CD4(+)FoxP3(+) regulatory T (T reg) cells comprise a separate lineage of T cells that are essential for maintaining immunological tolerance to self. The molecular mechanism(s) by which T reg cells mediate their suppressive effects remains poorly understood. One molecule that has been extensively studied in T reg cell suppression is transforming growth factor (TGF)-beta, but its importance remains controversial. We found that TGF-beta complexed to latency-associated peptide (LAP) is expressed on the cell surface of activated but not resting T reg cells. T reg cell LAP-TGF-beta plays an important role in the suppression of the proliferation of activated T cells, but it is not required for the suppression of naive T cell activation. More importantly, T reg cell-derived TGF-beta could generate de novo CD4(+)FoxP3(+) T cells in vitro from naive precursors in a cell contact-dependent, antigen-presenting cell-independent and alpha(V) integrin-independent manner. The newly induced CD4(+)FoxP3(+) T cells are suppressive both in vitro and in vivo. Transfer of activated antigen-specific T reg cells with naive antigen-specific responder T cells to normal recipients, followed by immunization, also results in induction of FoxP3 expression in the responder cells. T reg cell-mediated generation of functional CD4(+)FoxP3(+) cells via this TGF-beta-dependent pathway may represent a major mechanism as to how T reg cells maintain tolerance and expand their suppressive abilities.