A record 40% room temperature giant magnetoresistance has been achieved in a nanogranular Co/ Ag alloy by optimizing the concentration, sputtering conditions, and cumulative short thermal treatments. Upon annealing, the giant magnetoresistance effect exhibits a local minimum at 230°C before reaching its maximum at 300°C. Assuming the presence of both dipolar and RKKY-like exchange interactions between the particles, these features can be accounted for by considering that the latter correlations are progressively inhibited as the matrix, a supersaturated Ag-Co solid solution, segregates the solute Co atoms. This idea is supported by the temperature dependence of the magnetization in samples submitted to different annealings, where the zero-field cooled magnetization peaks at the lowest temperature in the sample exhibiting the largest magnetoresistance effect.