The NFAT5/TonEBP transcription factor, a recently identified rel/NF-κB family member, activates transcription of osmocompensatory genes in response to extracellular hyperosmotic stress. However, the function of NFAT5 under isosmotic conditions present in vivo remains unknown. Here we demonstrate that NFAT5 is necessary for optimal T cell development in vivo and allows for optimal cell growth ex vivo under conditions associated with osmotic stress. Transgenic mice expressing an inhibitory form of NFAT5 in developing and mature T cells exhibited a 30% reduction in thymic cellularity evenly distributed among thymic subsets, consistent with the uniform expression and nuclear localization of NFAT5 in each subset. This was associated with a 25% reduction in peripheral CD4+ T cells and a 50% reduction in CD8+ T cells. While transgenic T cells exhibited no impairment in cell growth or cytokine production under normal culture conditions, impaired cell growth was observed under both hyperosmotic conditions and isosmotic conditions associated with osmotic stress. Transgenic thymocytes also demonstrated increased sensitivity to osmotic stress. Consistent with this, the system A amino acid transporter gene ATA2 exhibited NFAT5 dependence under hypertonic conditions but not in response to amino acid deprivation. Expression of the TNF-α gene, a putative NFAT5 target, was not altered in transgenic T cells. These results not only demonstrate an osmoprotective function for NFAT5 in primary cells but also show that NFAT5 is necessary for optimal thymic development in vivo, suggesting that developing thymocytes within the thymic microenvironment are subject to an osmotic stress that is effectively countered by NFAT5-dependent responses.