Inhibitors of the JAK family of nonreceptor tyrosine kinases have demonstrated clinical efficacy in rheumatoid arthritis and other inflammatory disorders; however, the precise mechanisms by which JAK inhibition improves inflammatory immune responses remain unclear. In this study, we examined the mode of action of tofacitinib (CP-690,550) on JAK/STAT signaling pathways involved in adaptive and innate immune responses. To determine the extent of inhibition of specific JAK/STAT-dependent pathways, we analyzed cytokine stimulation of mouse and human T cells in vitro. We also investigated the consequences of CP-690,550 treatment on Th cell differentiation of naive murine CD4+ T cells. CP-690,550 inhibited IL-4–dependent Th2 cell differentiation and interestingly also interfered with Th17 cell differentiation. Expression of IL-23 receptor and the Th17 cytokines IL-17A, IL-17F, and IL-22 were blocked when naive Th cells were stimulated with IL-6 and IL-23. In contrast, IL-17A production was enhanced when Th17 cells were differentiated in the presence of TGF-β. Moreover, CP-690,550 also prevented the activation of STAT1, induction of T-bet, and subsequent generation of Th1 cells. In a model of established arthritis, CP-690,550 rapidly improved disease by inhibiting the production of inflammatory mediators and suppressing STAT1-dependent genes in joint tissue. Furthermore, efficacy in this disease model correlated with the inhibition of both JAK1 and JAK3 signaling pathways. CP-690,550 also modulated innate responses to LPS in vivo through a mechanism likely involving the inhibition of STAT1 signaling. Thus, CP-690,550 may improve autoimmune diseases and prevent transplant rejection by suppressing the differentiation of pathogenic Th1 and Th17 cells as well as innate immune cell signaling.