Glycoprotein A repetitions predominant (GARP) is expressed on the surface of activated human regulatory T cells (Treg) and regulates the bioavailability of transforming growth factor-β (TGF-β). GARP has been assumed to require membrane anchoring. To investigate the function of GARP in more detail, we generated a soluble GARP protein (sGARP) and analyzed its impact on differentiation and activation of human CD4⁺ T cells. We demonstrate that sGARP efficiently represses proliferation and differentiation of naïve CD4⁺ T cells into T effector cells. Exposure to sGARP induces Foxp3, decreases proliferation and represses interleukin (IL)-2 and interferon-γ production, resulting in differentiation of naïve T cells into induced Treg. This is associated with Smad2/3 phosphorylation and partially inhibited by blockade of TGF-β signaling. Furthermore, in the presence of the proinflammatory cytokines IL-6 and IL-23, sGARP facilitates the differentiation of naïve T cells into Th17 cells. More important, in a preclinical humanized mouse model of xenogeneic graft-versus-host disease (GVHD), sGARP prevents T cell–mediated destructive inflammation by enhancing Treg and inhibiting T effector cell activity. These results demonstrate a crucial role of sGARP in modulation of peripheral tolerance and T effector cell function, opening the possibility to use sGARP as a potent immunomodulator of inflammatory diseases including transplant rejection, autoimmunity, and allergy.