CD8 T‐lymphocytes are effector cells of cholangiocyte injury in human and in rhesus rotavirus (RRV)‐induced experimental biliary atresia (BA). Here we hypothesize that neonatal deficiency in CD25⁺CD4⁺ regulatory T cells (Tregs) leads to aberrant activation of hepatic T‐lymphocytes in BA. We found that adoptive transfer of total CD4 cells, but not of CD25‐depleted CD4 cells, prior to RRV inoculation reduced expansion of CD8 cells, plasma bilirubin levels, ductal inflammation, and bile duct epithelial injury at 7 days postinfection (dpi) compared with age‐matched infected controls without adoptive transfer. Searching for mechanisms, we found that in vitro production of interferon‐gamma (IFN‐γ) by naïve CD8 cells upon polyclonal stimulation was enhanced in coculture with hepatic dendritic cells (DCs) from RRV‐infected, but not with DCs from noninfected mice, which was correlated with an increased proportion of CD11b⁺ myeloid (m)DCs and up‐regulation of the costimulatory molecule CD86 on RRV‐primed DCs. Furthermore, DC‐dependent T‐lymphocyte activation was blocked by anti‐CD86 antibody in dose‐dependent fashion. Importantly, expression of CD86 on mDCs was down‐regulated by Tregs in vitro, and adoptive transfer of Treg‐containing CD4 cells decreased expression of CD86 on hepatic mDCs at 7 dpi. On the contrary, in mice resistant to experimental BA, CD25+ cell depletion aggravated bile duct injury at 12 dpi after RRV inoculation, as plasma bilirubin levels were elevated by >20‐fold compared with nondepleted infected controls. Increased susceptibility to hepatobiliary injury in Treg‐depleted mice was linked to hepatic CD8 expansion and enhanced stimulatory capacity of hepatic DCs. Conclusion: Activation of hepatic T‐lymphocytes driving biliary obstruction in BA is regulated by mDCs by way of CD86‐dependent costimulation and is susceptible to inhibition by Tregs. (HEPATOLOGY 2012;56:219–227)