TGF-β has been shown to be critical in the generation of CD4+ CD25+ Foxp3+ regulatory T cells (Tregs). Because Th3 cells produce large amounts of TGF-β, we asked whether induction of Th3 cells in the periphery was a mechanism by which CD4+ CD25+ Tregs were induced in the peripheral immune compartment. To address this issue, we generated a TGF-β1-transgenic (Tg) mouse in which TGF-β is linked to the IL-2 promoter and T cells transiently overexpress TGF-β upon TCR stimulation but produce little or no IL-2, IL-4, IL-10, IL-13, or IFN-γ. Naive TGF-β-Tg mice are phenotypically normal with comparable numbers of lymphocytes and thymic-derived Tregs. We found that repeated antigenic stimulation of pathogenic myelin oligodendrocyte glycoprotein (MOG)-specific CD4+ CD25− T cells from TGF-β Tg mice crossed to MOG TCR-Tg mice induced Foxp3 expression in both CD25+ and CD25− populations. Both CD25 subsets were anergic and had potent suppressive properties in vitro and in vivo. Furthermore, adoptive transfer of these induced regulatory CD25+/− T cells suppressed experimental autoimmune encephalomyelitis when administrated before disease induction or during ongoing experimental autoimmune encephalomyelitis. The suppressive effect of TGF-β on T cell responses was due to the induction of Tregs and not to the direct inhibition of cell proliferation. The differentiation of Th3 cells in vitro was TGF-β dependent as anti-TGF-β abrogated their development. Thus, Ag-specific TGF-β-producing Th3 cells play a crucial role in inducing and maintaining peripheral tolerance by driving the differentiation of Ag-specific Foxp3+ regulatory cells in the periphery.