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.