In this study, we document that Toxoplasma gondii differentiation and reactivation are mediated by systemic CD8 T-cell dysfunction during chronic infection. We demonstrate that CD8⁺ T-cell exhaustion occurs despite control of parasitemia during early-chronic toxoplasmosis. During later phases, these cells become exhausted, leading to parasite reactivation and mortality. Concomitant with increased CD8⁺ T-cell apoptosis and decreased effector response, this dysfunction is characterized by a graded elevation in expression of inhibitory receptor PD-1 on these cells in both lymphoid and nonlymphoid tissue. Blockade of the PD-1–PDL-1 pathway reinvigorates this suboptimal CD8⁺ T-cell response, resulting in control of parasite reactivation and prevention of mortality in chronically infected animals. To the best of our knowledge, this report is unique in showing that exposure to a persistent pathogen despite initial control of parasitemia can lead to CD8⁺ T-cell dysfunction and parasite reactivation.