Despite recent extensive studies, the molecular mechanism through which DCs induce allograft tolerance largely remains poorly understood. In the current study, we presented strong evidence supporting a role for IDO in DC-mediated allograft tolerance. Pre-treatment of recipient mice with IDO-transduced donor-specific BMDCs induced skin allograft tolerance in an antigen-dependent manner. Our data suggest that IDO-expressing DCs may regulate a delicate balance of cytokines that favors the differentiation of naïve CD4+ T cells into Tregs instead of CD4+ effector T cells. In addition, BMDCs with forced IDO expression also have higher capability to expand natural Tregs. In consistent with the observation of augmented Tregs detected in the recipient mice, the capacity for splenic T cell alloresponse was significantly reduced in recipient mice pre-treated with IDO-transduced BMDCs. Furthermore, the expression of inflammatory cytokines such as IL-2, IFNgamma, IL-6, IL-17A and IL-23p19, in splenic T cells of these recipient mice, was significantly lower as compared to that of recipient mice pre-treated with either GFP-transduced BMDCs or untransduced BMDCs.