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Although dysfunctional dendritic cells contribute to inadequate adaptive immunity in chronic hepatitis B (CHB), underlying molecular mechanisms remain largely undefined. In this study, we examined B7-H1 expression on circulating myeloid dendritic cells (mDCs) in 46 CHB patients, 10 autoimmune hepatitis patients, and 10 healthy subjects as control. We found that B7-H1 expression is significantly up-regulated on circulating mDCs of CHB and autoimmune hepatitis patients compared with healthy individuals. The B7-H1 up-regulation was significantly correlated with an elevation of serum alanine aminotransaminase levels and plasma viral load. In addition, in vitro, both IFN-alpha and IFN-gamma could strongly stimulate mDCs to express B7-H1. More importantly, elevated B7-H1 expression is also closely associated with the suppression of T cell immune function. In vitro blockade of B7-H1 signaling could not only down-regulate IL-10 and up-regulate IL-12 production by mDCs, but also enhance mDC-mediated allostimulatory capacity and cytokine production of T cells. Blockade of B7-H1 signaling could improve hepatitis B c Ag-pulsed monocyte-derived DC-induced IFN-gamma production by autologous hepatitis B virus-specific T cells. These new findings suggested that chronic inflammation may contribute to B7-H1 up-regulation on mDCs in CHB patients, which potentially cause defective hepatitis B virus-specific T cell function and viral persistence. Our findings further support the notion that the blockade of B7-H1 may represent a novel therapeutic approach for this disease.