Follistatin-like protein-1 (FSTL-1) is a poorly characterized protein that is up-regulated in the early stage of collagen-induced arthritis and that exacerbates arthritis when delivered by gene transfer. The current study was designed to determine the mechanism by which FSTL-1 promotes arthritis. FSTL-1 was injected into mouse paws, resulting in severe paw swelling associated with up-regulation of IFN-γ transcript and the IFN-γ-induced chemokine, CXCL10. Mice depleted of T cells were protected. A central role for IFN-γ was confirmed by the finding that mice deficient in IFN-γ failed to exhibit paw swelling in response to injection of FSTL-1. Furthermore, IFN-γ secretion from mouse spleen cells exposed to a weak TCR signal was increased 5-fold in the presence of FSTL-1. FSTL-1 could be induced by innate immune signals, including TLR4 agonists and the arthritogenic cytokine, IL-1β, via an NFκB pathway. Finally, FSTL-1 was found to be overexpressed in human arthritis and its neutralization inhibited murine collagen-induced arthritis and suppressed IFN-γ and CXCL10 production in arthritic joints. These findings demonstrate that FSTL-1 plays a critical role in arthritis by enhancing IFN-γ signaling pathways and suggest a mechanism by which FSTL-1 bridges innate and adaptive immune responses.