CD4(+) T cell differentiation and function are critically dependent on the type of APC and the microenvironment in which Ag presentation occurs. Most studies have documented the effect of dendritic cells on effector and regulatory T cell differentiation; however, macrophages are the most abundant APCs in the periphery and can be found in virtually all organs and tissues. The effect of macrophages, and in particular their subsets, on T cell function has received little attention. Previously, we described distinct subsets of human macrophages (pro- and anti-inflammatory, m phi1 and m phi2, respectively) with highly divergent cell surface Ag expression and cytokine/chemokine production. We reported that human m phi1 promote, whereas m phi2 decrease, Th1 activation. Here, we demonstrate that m phi2, but not m phi1, induce regulatory T cells with a strong suppressive phenotype (T(m phi2)). Their mechanism of suppression is cell-cell contact dependent, mediated by membrane-bound TGFbeta-1 expressed on the regulatory T cell (Treg) population since inhibition of TGFbeta-1 signaling in target cells blocks the regulatory phenotype. T(m phi2), in addition to mediating cell-cell contact-dependent suppression, express typical Treg markers such as CD25, glucocorticoid-induced TNF receptor (GITR), and Foxp3 and are actively induced by m phi2 from CD25-depleted cells. These data identify m phi2 cells as a novel APC subset capable of inducing Tregs. The ability of anti-inflammatory macrophages to induce Tregs in the periphery has important implications for understanding Treg dynamics in pathological conditions where macrophages play a key role in inflammatory disease control and exacerbation.