CD4+ CD25+ regulatory cells are a subpopulation of T lymphocytes of thymic origin. However, recent data suggest an alternative commitment of regulatory T cells in the periphery, although the precise mechanism is unknown. In the present work, we demonstrate that TGF-β is able to induce Foxp3 expression and subsequently a regulatory phenotype in CD4+ CD25− peripheral murine T cells. Similarly, TGF-β induced Foxp3 in human CD4+ CD25− T cells. Moreover, we show that the inhibitory Smad7 protein that is normally induced by TGF-β and limits TGF-β signaling, is strongly down-regulated by Foxp3 at the transcriptional level. Foxp3-mediated down-regulation of Smad7 subsequently rendered CD4+ CD25− T cells highly susceptible to the morphogenic and regulatory effects of TGF-β signaling via Smad3/4. In summary, we demonstrate that TGF-β induces a regulatory phenotype in CD4+ CD25− T cells through the induction of Foxp3 and a positive autoregulatory loop of TGF-β signaling due to the absence of Smad7.