Aims/hypothesis CD40 expressed in Muller cells is a central driver of diabetic retinopathy. CD40 causes phospholipase C gamma 1 (PLC gamma 1)-dependent ATP release in Muller cells followed by purinergic receptor (P2X(7))-dependent production of proinflammatory cytokines in myeloid cells. In the diabetic retina, CD40 and P2X(7) upregulate a broad range of inflammatory molecules that promote development of diabetic retinopathy. The molecular event downstream of CD40 that activates the PLC gamma 1-ATP-P2X(7)-proinflammatory cytokine cascade and promotes development of diabetic retinopathy is unknown. We hypothesise that disruption of the CD40-driven molecular events that trigger this cascade prevents/treats diabetic retinopathy in mice. Methods B6 and transgenic mice with Muller cell-restricted expression of wild-type (WT) CD40 or CD40 with mutations in TNF receptor-associated factor (TRAF) binding sites were made diabetic using streptozotocin. Leucostasis was assessed using FITC-conjugated concanavalin A. Histopathology was examined in the retinal vasculature. Expression of inflammatory molecules and phospho-Tyr783 PLC gamma 1 (p-PLC gamma 1) were assessed using real-time PCR, immunoblot and/or immunohistochemistry. Release of ATP and cytokines were measured by ATP bioluminescence and ELISA, respectively. Results Human Muller cells with CD40 Delta T2,3 (lacks TRAF2,3 binding sites) were unable to phosphorylate PLC gamma 1 and release ATP in response to CD40 ligation, and could not induce TNF-alpha/IL-1 beta secretion in bystander myeloid cells. CD40-TRAF signalling acted via Src to induce PLC gamma 1 phosphorylation. Diabetic mice in which WT CD40 in Muller cells was replaced by CD40 Delta T2,3 failed to exhibit phosphorylation of PLC gamma 1 in these cells and upregulate P2X(7) and TNF-alpha in microglia/macrophages. P2x(7) (also known as P2rx7), Tnf-alpha (also known as Tnf), Il-1 beta (also known as Il1b), Nos2, Icam-1 (also known as Icam1) and Ccl2 mRNA were not increased in these mice and the mice did not develop retinal leucostasis and capillary degeneration. Diabetic B6 mice treated intravitreally with a cell-permeable peptide that disrupts CD40-TRAF2,3 signalling did not exhibit either upregulation of P2X(7) and inflammatory molecules in the retina or leucostasis. Conclusions/interpretation CD40-TRAF2,3 signalling activated the CD40-PLC gamma 1-ATP-P2X(7)-proinflammatory cytokine pathway. Src functioned as a link between CD40-TRAF2,3 and PLC gamma 1. Replacing WT CD40 with CD40 Delta T2,3 impaired activation of PLC gamma 1 in Muller cells, upregulation of P2X(7) in microglia/macrophages, upregulation of a broad range of inflammatory molecules in the diabetic retina and the development of diabetic retinopathy. Administration of a peptide that disrupts CD40-TRAF2,3 signalling reduced retinal expression of inflammatory molecules and reduced leucostasis in diabetic mice, supporting the therapeutic potential of pharmacological inhibition of CD40-TRAF2,3 in diabetic retinopathy.