Human plasmacytoid dendritic cells (PDCs) can drive naive, allogeneic CD4+CD25+ T cells to differentiate into CD4 +CD25+. Foxp3+ regulatory T cells (Tregs). However, the intracellular mechanism or mechanisms underlying PDC-induced Treg generation are unknown. In this study, we show that human PDCs express high levels of IDO, an intracellular enzyme that catabolizes tryptophan degradation. Triggering of TLR 9 with CpG oligodeoxynucleotides activates PDCs to up-regulate surface expression of B7 ligands and HLA-DR Ag, but also significantly increases the expression of IDO and results in the generation of inducible Tregs from CD4+CD25+ T cells with potent suppressor cell function. Blocking IDO activity with the pharmacologic inhibitor 1-methyl-D-tryptophan significantly abrogates PDC-driven inducible Treg generation and suppressor cell function. Adding kynurenine, the immediate downstream metabolite of tryptophan, bypasses the 1-methyl-D-tryptophan effect and restores PDC-driven Treg generation. Our results demonstrate that the IDO pathway is essential for PDC-driven Treg generation from CD4+ CD25- T cells and implicate the generation of kynurenine pathway metabolites as the critical mediator of this process.