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Although characterization of T cell exhaustion has unlocked powerful immunotherapies, the mechanisms sustaining adaptations of short-lived innate cells to chronic inflammatory settings remain unknown. During murine chronic viral infection, we found that concerted events in bone marrow and spleen mediated by type I interferon (IFN-I) and Toll-like receptor 7 (TLR7) maintained a pool of functionally exhausted plasmacytoid dendritic cells (pDCs). In the bone marrow, IFN-I compromised the number and the developmental capacity of pDC progenitors, which generated dysfunctional pDCs. Concurrently, exhausted pDCs in the periphery were maintained by self-renewal via IFN-I- and TLR7-induced proliferation of CD4− subsets. On the other hand, pDC functional loss was mediated by TLR7, leading to compromised IFN-I production and resistance to secondary infection. These findings unveil the mechanisms sustaining a self-perpetuating pool of functionally exhausted pDCs and provide a framework for deciphering long-term exhaustion of other short-lived innate cells during chronic inflammation.IFN-I downregulates E2-2 in BM progenitors and compromises BM pDC generationIFN-I and TLR7 induce pDC proliferation and sustain exhausted pDC numbersTLR7 downregulates E2-2 and mediates loss of function in exhausted pDCsTLR7 deficiency enhances IFN-I elevation and resistance upon secondary MCMV infectionThe mechanisms underlying the maintenance and dysfunction of exhausted pDCs during chronic viral infection are unclear. Macal and Jo et al. find that exhausted pDCs are maintained by IFN-I and TLR7 signaling via multiple mechanisms, including inhibition of bone marrow pDC generation, sustained proliferation of exhausted pDCs, and promotion of pDC functional loss, the latter of which leads to impaired host defense to secondary infection.