CD4+ T regulatory type 1 (Tr1) cells suppress Ag-specific immune responses in vitro and in vivo. Although IL-10 is critical for the differentiation of Tr1 cells, the effects of other cytokines on differentiation of naive T cells into Tr1 cells have not been investigated. Here we demonstrate that endogenous or exogenous IL-10 in combination with IFN-α, but not TGF-β, induces naive CD4+ T cells derived from cord blood to differentiate into Tr1 cells: IL-10+ IFN-γ+ IL-2−/low IL-4−. Naive CD4+ T cells derived from peripheral blood require both exogenous IL-10 and IFN-α for Tr1 cell differentiation. The proliferative responses of the Tr1-containing lymphocyte populations, following activation with anti-CD3 and anti-CD28 mAbs, were reduced. Similarly, cultures containing Tr1 cells displayed reduced responses to alloantigens via a mechanism that was partially mediated by IL-10 and TGF-β. More importantly, Tr1-containing populations strongly suppressed responses of naive T cells to alloantigens. Collectively, these results show that IFN-α strongly enhances IL-10-induced differentiation of functional Tr1 cells, which represents a first major step in establishing specific culture conditions to generate T regulatory cells for biological and biochemical analysis, and for cellular therapy to induce peripheral tolerance in humans.