Regulatory T (Treg) cells are being used to treat autoimmunity and prevent organ rejection; however, Treg cell-based therapies have been hampered by the technical limitation in obtaining a high number of functional Treg cells. In this study, we show how to generate functional Treg cells from induced pluripotent stem (iPS) cells and to determine the potential role of such cells for Treg cell-based immunotherapy against autoimmunity in a therapeutic setting. Ligation of a Notch ligand and transduction of the gene Foxp3 induce iPS cells to differentiate into Treg cells. Expression of Foxp3 and coculture on Notch ligand-expressing stromal cells augment expression of CD3, TCR, CD4, CD25, and CTLA-4 on iPS cell-differentiated Treg cells, which are able to secrete TGF-β and IL-10 both in vivo and in vitro. Importantly, adoptive transfer of iPS cell-derived Treg cells expressing large amounts of Foxp3 and Bcl-x L significantly suppresses host immune responses and reduces arthritis development within murine models. These data suggest that Notch signaling and Foxp3 regulate the development and function of Treg cells derived from iPS cells. Our results provide a novel approach for generating potentially therapeutic Treg cells for the treatment of autoimmune diseases.