Gammaherpesviruses, such as Epstein-Barr virus and Kaposi's sarcoma-associated herpesvirus, are important human pathogens involved in lymphoproliferative disorders and tumorigenesis. Herpesvirus infections are characterized by a biphasic cycle comprised of an acute phase with lytic replication and a latent state. Murine gammaherpesvirus 68 (MHV-68) is a well-established model for the study of lytic and latent life cycles in the mouse. We investigated the interplay between the type I interferon (IFN)-mediated innate immune response and MHV-68 latency using sensitive bioluminescent reporter mice. Adoptive transfer of latently infected splenocytes into type I IFN receptor-deficient mice led to a loss of latency control. This was revealed by robust viral propagation and dissemination of MHV-68, which coincided with type I IFN reporter induction. Despite MHV-68 latency control by IFN, the continuous low-level cell-to-cell transmission of MHV-68 was detected in the presence of IFN signaling, indicating that IFN cannot fully prevent viral dissemination during latency. Moreover, impaired type I IFN signaling in latently infected splenocytes increased the risk of virus reactivation, demonstrating that IFN directly controls MHV-68 latency in infected cells. Overall, our data show that locally constrained type I IFN responses control the cellular reservoir of latency, as well as the distribution of latent infection to potential new target cells.