Neurons have been neglected as cells with a major immune-regulatory function because they do not express major histocompatibility complex class II. Our data show that neurons are highly immune regulatory, having a crucial role in governing T-cell response and central nervous system (CNS) inflammation. Neurons induce the proliferation of activated CD4+ T cells through B7-CD28 and transforming growth factor (TGF)-beta1-TGF-beta receptor signaling pathways, resulting in amplification of T-cell receptor signaling through phosphorylated ZAP-70, interleukin (IL)-2 and IL-9. The interaction between neurons and T cells results in the conversion of encephalitogenic T cells to CD25+ TGF-beta1+ CTLA-4+ FoxP3+ T regulatory (Treg) cells that suppress encephalitogenic T cells and inhibit experimental autoimmune encephalomyelitis. Suppression is dependent on cytotoxic T lymphocyte antigen (CTLA)-4 but not TGF-beta1. Autocrine action of TGF-beta1, however, is important for the proliferative arrest of Treg cells. Blocking the B7 and TGF-beta pathways prevents the CNS-specific generation of Treg cells. These findings show that generation of neuron-dependent Treg cells in the CNS is instrumental in regulating CNS inflammation.