In this study, we investigated the effect of a lentivirus-induced interferon (LV-IFN) on the interaction of caprine arthritis-encephalitis virus and its host cell, the monocyte-macrophage. LV-IFN was produced in culture supernatant 48 h after adding fresh goat lymphocytes to caprine arthritis-encephalitis virus-infected goat macrophages. The culture supernatant contained IFN activity at a titer of 1:360 as assayed by inhibition of vesicular stomatitis virus-induced lysis of fibroblasts. LV-IFN inhibited in vitro monocyte proliferation and maturation of monocytes to macrophages. Nevertheless, treated monocytes produced prostaglandin E2, a cytokine generally produced by activated macrophages. By inhibiting the maturation of monocytes to the more permissive macrophage, LV-IFN indirectly downregulated virus replication. The cytokine also had a direct inhibitory effect on virus gene expression in already mature macrophages. In these cells, LV-IFN blocked the viral life cycle at the level of transcription. Finally, LV-IFN blocked fusion between infected macrophages and highly permissive goat synovial membrane cells. By restricting macrophage maturation, viral replication, and cell fusion, LV-IFN may downregulate the net rate of virus replication in vivo. These functions may contribute to the persistence of the virus in the host by reducing the expression of the viral genome.