Indian post-kala-azar dermal leishmaniasis (PKDL) is a low-frequency (5-10%) dermal sequela of visceral leishmaniasis (VL) caused by Leishmania donovani; importantly, affected individuals are speculated to be parasite reservoirs. Insight into its immunopathogenesis could translate into rational immunomodulatory therapeutic approaches against leishmaniases. In patients with PKDL (n=21), peripheral lymphocytes were analyzed for surface markers, intracellular cytokines, and lymphoproliferative responses using flow cytometry. In lesional tissue biopsies (n=12), expression of counter-regulatory cytokines (IFN-gamma and IL-10) and the T-regulatory transcription factor forkhead box protein 3 (Foxp3) was analyzed using reverse transcriptase-PCR, along with immunohistochemical detection (n=8) of CD3 and Foxp3 positivity. In patients with PKDL, circulating CD8(+)CD28(-) and antigen-induced IL-10(+)CD3(+) lymphocytes were increased and receded with treatment. CD8(+) lymphocytes showed impaired proliferative responses to L. donovani antigen (LDA) and phytohemagglutinin, which were reinstated after treatment. At presentation, the upregulated lesional IFN-gamma and IL-10 messenger RNA (mRNA), Foxp3 mRNA, and protein were curtailed after treatment. In Indian patients with PKDL, increased frequency of the CD8(+)CD28(-) phenotype, enhanced antigen-specific IL-10 production, and accompanying anergy of circulating lymphocytes suggest their regulatory nature. Furthermore, the concomitantly elevated lesional expression of Foxp3 suggests their possible recruitment into the lesional site, which would sustain disease pathology.