Pancreatic lymph node-derived CD4+CD25+ T regulatory (Treg) cells inhibit in situ differentiation of islet-reactive CD8+ T cells into cytotoxic T lymphocytes, thereby preventing diabetes progression. The mechanism by which these Treg cells suppress anti-islet CD8+ T cells is unknown. Here, we show by using a CD8+ T cell-mediated model of type 1 diabetes that transforming growth factor (TGF)-beta-TGF-beta receptor signals are critical for CD4+CD25+ Treg cell regulation of autoreactive islet-specific cytotoxic T lymphocytes. Transgenic expression of tumor necrosis factor alpha from birth to 25 days of age in the islets of B6 mice that constitutively express CD80 on their beta cells results in accumulation of CD4+CD25+TGF-beta+ cells exclusively in the islets and pancreatic lymph nodes, which delays diabetes progression. In contrast, expression of tumor necrosis factor alpha until 28 days of age prevents islet accumulation of CD4+CD25+TGF-beta+ Treg cells, resulting in acceleration to diabetes. Furthermore, adoptive transfer experiments demonstrated that CD4+CD25+ Treg cells could not control naïve or activated islet-reactive CD8+ T cells bearing a dominant negative TGF-beta receptor type II. Our data demonstrate that, in vivo, TGF-beta signaling in CD8+ T cells is critical for CD4+CD25+ Treg cell suppression of islet-reactive CD8+ T cells in type 1 diabetes.