Naturally occurring FOXP3⁺CD4⁺ Treg have a crucial role in self‐tolerance. The ability to generate similar populations against alloantigens offers the possibility of preventing transplant rejection without indefinite global immunosuppression. Exposure of mice to donor alloantigens combined with anti‐CD4 antibody induces operational tolerance to cardiac allografts, and generates Treg that prevent skin and islet allograft rejection in adoptive transfer models. If protocols that generate Treg in vivo are to be developed in the clinical setting it will be important to know the origin of the Treg population and the mechanisms responsible for their generation. In this study, we demonstrate that graft‐protective Treg arise in vivo both from naturally occurring FOXP3⁺CD4⁺ Treg and from non‐regulatory FOXP3⁻CD4⁺ cells. Importantly, tolerance induction also inhibits CD4⁺ effector cell priming and T cells from tolerant mice have impaired effector function in vitro. Thus, adaptive tolerance induction shapes the immune response to alloantigen by converting potential effector cells into graft‐protective Treg and by expanding alloreactive naturally occurring Treg. In relation to clinical tolerance induction, the data indicate that while the generation of alloreactive Treg may be critical for long‐term allograft survival without chronic immunosuppression, successful protocols will also require strategies that target potential effector cells.