CD4+CD25+ regulatory T cells (Treg) are instrumental in the maintenance of immunological tolerance. One critical question is whether Treg can only be generated in the thymus or can differentiate from peripheral CD4+CD25- naive T cells. In this paper, we present novel evidence that conversion of naive peripheral CD4+CD25- T cells into anergic/suppressor cells that are CD25+, CD45RB-/low and intracellular CTLA-4+ can be achieved through costimulation with T cell receptors (TCRs) and transforming growth factor beta (TGF-beta). Although transcription factor Foxp3 has been shown recently to be associated with the development of Treg, the physiological inducers for Foxp3 gene expression remain a mystery. TGF-beta induced Foxp3 gene expression in TCR-challenged CD4+CD25- naive T cells, which mediated their transition toward a regulatory T cell phenotype with potent immunosuppressive potential. These converted anergic/suppressor cells are not only unresponsive to TCR stimulation and produce neither T helper cell 1 nor T helper cell 2 cytokines but they also express TGF-beta and inhibit normal T cell proliferation in vitro. More importantly, in an ovalbumin peptide TCR transgenic adoptive transfer model, TGF-beta-converted transgenic CD4+CD25+ suppressor cells proliferated in response to immunization and inhibited antigen-specific naive CD4+ T cell expansion in vivo. Finally, in a murine asthma model, coadministration of these TGF-beta-induced suppressor T cells prevented house dust mite-induced allergic pathogenesis in lungs.