Programmed cell death 1 (PD-1) is a negative costimulatory receptor critical for the suppression of T cell activation in vitro and in vivo. Single cell imaging elucidated a molecular mechanism of PD-1–mediated suppression. PD-1 becomes clustered with T cell receptors (TCRs) upon binding to its ligand PD-L1 and is transiently associated with the phosphatase SHP2 (Src homology 2 domain–containing tyrosine phosphatase 2). These negative costimulatory microclusters induce the dephosphorylation of the proximal TCR signaling molecules. This results in the suppression of T cell activation and blockade of the TCR-induced stop signal. In addition to PD-1 clustering, PD-1–TCR colocalization within microclusters is required for efficient PD-1–mediated suppression. This inhibitory mechanism also functions in PD-1^hi T cells generated in vivo and can be overridden by a neutralizing anti–PD-L1 antibody. Therefore, PD-1 microcluster formation is important for regulation of T cell activation.