Whereas xenogeneic tumors such as baby hamster kidney or HeLa cells grow in nude mice, the same cells persistently infected with a variety of viruses are rejected. Spleen cells from normal nude mice were found to be induced to produce interferon and to exert natural killer (NK) activity on virus persistently infected (PI) tumor cells, and not on uninfected parental cells in vitro. The phenotype of the interferon-producing cells and the NK effector cells was found to be the same namely, Qa 5(+), Ly 5(+), ganglio-N- tetraosylceramide, with 35 percent of the NK cells also expressing Thy 1.2. NK activity against virus PI tumor cell lines could be nonspecifically augmented both in vivo and in vitro by prior contact with virus PI tumor cells. It was unambiguously demonstrated with chemically homogeneous mouse interferon that interferon, and not a contaminant, was responsible for the augmentation of NK activity in vitro. Studies on the mode of interferon action in augmenting NK activity revealed that the target cell for interferon action was serologically distinct from the NK effector cell. Anti-Ly 5 + complement (C)-treated spleen cells were depleted of NK activity and the ability to produce interferon, but, upon incubation with interferon for 1-3 h, regained both NK activity and susceptibility to anti-Ly 5 + C. Treatment with anti-Qa 5 + C eliminated NK activity, which could not be restored by the addition of interferon. We conclude that interferon produced by Ly 5(+) cells in response to virus PI tumor cells acts on Ly 5(-) precursor cells and induces their differentiation into functional Ly 5(+) NK effector cells.