The molecular and cellular mechanisms mediating thymic central tolerance and prevention of autoimmunity are not fully understood. Here we show that B7-CD28 co-stimulation and B7 expression by specific antigen-presenting cell (APC) types are required for clonal deletion and for regulatory T (Treg) cell generation from endogenous tissue-restricted antigen (TRA)-specific thymocytes. While B7-CD28 interaction is required for both clonal deletion and Treg induction, these two processes differ in their CD28 signaling requirements and in their dependence on B7-expressing dendritic cells, B cells, and thymic epithelial cells. Meanwhile, defective thymic clonal deletion due to altered B7-CD28 signaling results in the accumulation of mature, peripheral TRA-specific T cells capable of mediating destructive autoimmunity. Our findings thus reveal a function of B7-CD28 co-stimulation in shaping the T cell repertoire and limiting autoimmunity through both thymic clonal deletion and Treg cell generation.