Therapies that promote tolerance in solid organ transplantation will improve patient outcomes by eliminating the need for long-term immunosuppression. To investigate mechanisms of rapamycin-induced tolerance, C3H/HeJ mice were heterotopically transplanted with MHC-mismatched hearts from BALB/cJ mice and were monitored for rejection after a short course of rapamycin treatment. Mice that had received rapamycin developed tolerance with indefinite graft survival, whereas untreated mice all rejected their grafts within 9 days. In vitro, splenic mononuclear cells from tolerant mice maintained primary CD4+ and CD8+ immune responses to donor antigens consistent with a mechanism that involves active suppression of immune responses. Furthermore, infection with lymphocytic choriomeningitis virus strain WE led to loss of tolerance suggesting that tolerance could be overcome by infection. Rapamycin-induced, donor-specific tolerance was associated with an expansion of regulatory T (Treg) cells in both the spleen and allograft and elevated plasma levels of fibrinogen-like protein 2 (FGL2). Depletion of Treg cells with anti-CD25 (PC61) and treatment with anti-FGL2 antibody both prevented tolerance induction. Tolerant allografts were populated with Treg cells that co-expressed FGL2 and FoxP3, whereas rejecting allografts and syngeneic grafts were nearly devoid of dual-staining cells. We examined the utility of an immunoregulatory gene panel to discriminate between tolerance and rejection. We observed that Treg-associated genes (foxp3, lag3, tgf-β and fgl2) had increased expression and pro-inflammatory genes (ifn-γ and gzmb) had decreased expression in tolerant compared with rejecting allografts. Taken together, these data strongly suggest that Treg cells expressing FGL2 mediate rapamycin-induced tolerance. Furthermore, a gene biomarker panel that includes fgl2 can distinguish between rejecting and tolerant grafts.