FTY720 is a novel immunosuppressant that improves the outcomes after solid organ and bone marrow transplantation (BMT) due to the sequestration of T cells into LN. We tested the hypothesis that the sequestration of donor T cells in LN by FTY720 would enhance their interaction with host APC, thus causing a greater degree of activation‐induced apoptosis of alloreactive T cells, and thereby resulting in a reduction of graft‐vs.‐host disease (GVHD). The short‐term administration of FTY720 improved the recipient survival after allogeneic BMT. FTY720 treatment facilitated a rapid contraction of the donor T cell pool in association with an increased degree of apoptosis of donor T cells. The donor T cell reactivity to host alloantigens was diminished in host's LN and adoptive transfer of donor T cells isolated from LN of FTY720‐treated recipients of allogeneic BMT induced less severe GVHD in secondary recipients than the transfer from controls. Caspase‐dependent apoptosis was involved in this mechanism because FTY720‐induced protection was abrogated when a pan‐caspase inhibitor was administered. These findings thus demonstrate the presence of a novel mechanism by which FTY720 modulates the allogeneic T cell responses: namely, by the induction of activation‐induced apoptosis of alloreactive T cells in LN.