CD4⁺CD25⁺ regulatory T cells (Tregs) are well known to suppress immunopathology induced in lymphopenic animals following T cell reconstitution, including acute graft-versus-host disease (GVHD) post-bone marrow transplantation. The regulatory potential of this subset in nonlymphopenic hosts and in chronic, Th2-mediated GVHD is less clear. We have generated alloantigen-specific cells from CD4⁺CD25⁺ populations stimulated with MHC-disparate dendritic cells and found them to express a stable Treg forkhead box p3⁺ phenotype with enhanced suppressive activity mediated by cell contact. When transferred into nonlymphopenic F1 hosts, nonspecific Tregs proliferated as rapidly as CD4⁺CD25⁻ cells but displayed distinct growth kinetics in vitro. Tregs, expanded in response to alloantigen in vitro, displayed greatly enhanced suppressive activity, which was partially antigen-specific. They were effective inhibitors of chronic GVHD, blocking donor cell engraftment, splenomegaly, autoantibody production, and glomerulonephritis. CD25⁺ and CD25⁻ cells were equally susceptible to inhibition by immunosuppressive drugs targeting TCR signaling and rapamycin, but Tregs were resistant to inhibition by dexamethasone. The data indicate that alloantigen-driven expansion, rather than homeostatic proliferation, is key to the effectiveness of CD4⁺CD25⁺ Tregs in GVHD and suggest that cellular therapy with alloantigen-induced Tregs in combination with glucocorticoid treatment would be effective in prevention of chronic GVHD after immune reconstitution.