Our goal is to develop effective islet xenografts for treating human diabetes. We have studied microencapsulated neonatal porcine islet cell clusters (ICCs) transplanted intraperitoneally in spontaneously diabetic NOD mice, where they function to maintain normoglycemia in the autoimmune host. Nonencapsulated neonatal porcine ICCs functioned for 4.5 ± 0.5 days before being rejected; encapsulation prolonged graft function to 17 ± 2 days. CTLA4-Ig treatment did not enhance the survival of nonencapsulated ICCs. However, CTLA4-Ig treatment significantly extended the function of encapsulated ICCs to 73 ± 5 days. Histological analyses demonstrated a profuse pericapsular cellular reaction associated with rejection of encapsulated islet xenografts in untreated mice, while this reaction was significantly reduced in CTLA4-Ig-treated mice. To study mechanisms of xenograft rejection in this model, we analyzed proliferative responses to neonatal porcine ICCs and cytokines present in the peritoneal cavities of transplanted mice. Spleen cells from both CTLA4-Ig-treated and untreated rejecting NODs exhibited vigorous proliferation in the absence of antigenic stimulation, suggesting prior activation in vivo, while splenocytes from CTLA4-Ig-treated NODs with functioning grafts had low proliferative levels, equal to controls. Islet-specific proliferation was not detected in islet-rejecting mice, perhaps due to their high background levels. With the exception of elevated IL-6 levels, empty capsules did not provoke a significant peritoneal cytokine response compared with sham surgery or untransplanted control mice. However, IL-5, IL-12, TGF-β and IL-1β were significantly elevated in NODs receiving encapsulated neonatal porcine ICCs compared with untransplanted controls. There were no significant differences between peritoneal cytokine concentrations in CTLA4-Ig-treated mice with long-term functioning grafts compared to mice that rejected grafts at earlier time points. We conclude that the combination of donor islet microencapsulation and brief treatment of the recipient with co-stimulatory blockade delays sensitization of the host, possibly by altering mechanism(s) for recruitment and/or activation of host effector cells.