Naive T cell activation involves at least two signals from an APC, one through the TCR via interaction with peptide-MHC complexes and a second through ligation of CD28 with B7 ligands. Following activation, T cells upregulate a host of other membrane-bound costimulatory molecules that can either promote or inhibit further T cell maturation and proliferation. In some cases, it is necessary to attenuate T cell activation to prevent deleterious inflammation, and inhibitory members of the B7/butyrophilin family of ligands have evolved to balance the strong stimuli the activating B7 ligands confer. Human genetic association and in vitro studies have implicated one such ligand, BTNL2, in controlling inflammation at mucosal surfaces. In this study, we show that recombinant mouse BTNL2 modifies B7/CD28 signaling to promote expression of Foxp3, a transcription factor necessary for regulatory T cell (Treg) development and function. BTNL2 blocks Akt-mediated inactivation of Foxo1, a transcription factor necessary for Foxp3 expression. Immunophenotyping and gene profiling reveal that BTNL2-induced Treg share many properties with natural Treg, and in vivo they suppress enteritis induced by mouse effector T cells. These findings describe a mechanism by which environmental Ag-specific Tregs may be induced by APC expressing specific modulators of costimulatory signals.