CD4 + CD25 + regulatory T cells (Tregs) are potent suppressors, playing important roles in autoimmunity and transplantation tolerance. Understanding the signals necessary for the generation and expansion of Tregs is important for clinical cellular therapy, but only limited progress has been made. Recent reports suggest a role for TGF-β in the generation of Tregs from CD4 + CD25 − precursors, but the mechanism remains unknown. Here, we demonstrate that TGF-β2 triggers Foxp3 expression in CD4 + CD25 − precursors, and these Foxp3 + cells act like conventional Tregs. The generation of Foxp3 + Tregs requires stimulation of the T-cell receptor, the IL-2R and the TGF-β receptor. More importantly, strong costimulation through CD28 prevents Foxp3 expression and suppressive function in an IL-4-dependent manner. Furthermore, TGF-β-driven Tregs inhibit innate inflammatory responses to syngeneic transplanted pancreatic islets and enhance islet transplant survival. Thus, TGF-β is a key regulator of the signaling pathways that initiate and maintain Foxp3 expression and suppressive function in CD4 + CD25 − precursors. TGF-β and signaling through TGF-β receptor, CD28 costimulation and IL-4 may be key components for the manipulation of Treg. The de novo generation of Foxp3 + cells from CD4 + cells has the potential to be used for treatment of autoimmune diseases and induction of transplant tolerance.