Use of Foxp3-positive (Foxp3⁺) T-regulatory (Treg) cells as potential cellular therapy in patients with autoimmunity, or post-stem cell or -organ transplantation, requires a sound understanding of the transcriptional regulation of Foxp3. Conserved CpG dinucleotides in the Treg-specific demethylation region (TSDR) upstream of Foxp3 are demethylated only in stable, thymus-derived Foxp3⁺ Treg cells. Since methyl-binding domain (Mbd) proteins recruit histone-modifying and chromatin-remodeling complexes to methylated sites, we tested whether targeting of Mbd2 might promote demethylation of Foxp3 and thereby promote Treg numbers or function. Surprisingly, while chromatin immunoprecipitation (ChIP) analysis showed Mbd2 binding to the Foxp3-associated TSDR site in Treg cells, Mbd2 targeting by homologous recombination, or small interfering RNA (siRNA), decreased Treg numbers and impaired Treg-suppressive function in vitro and in vivo. Moreover, we found complete TSDR demethylation in wild-type (WT) Treg cells but >75% methylation in Mbd2^−/− Treg cells, whereas reintroduction of Mbd2 into Mbd2-null Treg cells restored TSDR demethylation, Foxp3 gene expression, and Treg-suppressive function. Lastly, thymic Treg cells from Mbd2^−/− mice had normal TSDR demethylation, but compared to WT Treg cells, peripheral Mbd2^−/− Treg cells had a marked impairment of binding of Tet2, the DNA demethylase enzyme, at the TSDR site. These data show that Mbd2 has a key role in promoting TSDR demethylation, Foxp3 expression, and Treg-suppressive function.