Inflammation is part of many neurological disorders and immune reactions may influence neuronal progenitor cells (NPCs) contributing to the disease process. Our knowledge about the interplay between different cell types in brain inflammation are not fully understood. It is important to know the mechanisms and factors involved in order to enhance regeneration and brain repair. We show here that NPCs express receptors for interferon-gamma (IFN gamma), and IFN gamma activates the signal transducer and activator of transcription (STAT) protein-1. IFN gamma reduced cell proliferation in NPCs by upregulation of the cell cycle protein p21 as well as induced cell death of NPCs by activating caspase-3. Studies of putative factors for rescue showed that the neuropeptide, Pituitary adenylate cyclase-activating polypeptide (PACAP) increased cell viability, the levels of p-Bad and reduced caspase-3 activation in the NPCs. Medium from cultured microglia contained IFN gamma and decreased the viability of NPCs, whilst blocking with anti-IFN gamma antibodies counteracted this effect. The results show that NPCs are negatively influenced by IFN gamma whereas PACAP is able to modulate its action. The interplay between IFN gamma released from immune cells and PACAP is of importance in brain inflammation and may affect the regeneration and recruitment of NPCs in immune diseases. The observed effects of IFN gamma on NPCs deserve to be taken into account in human anti-viral therapies particularly in children with higher rates of brain stem cell proliferation.