Transforming growth factor beta1 (TGFbeta1) is a pleiotropic cytokine, capable of exerting diverse biologic effects. Despite its central role in multiple immune activities, the molecular signals responsible for shaping TGFbeta1's immunologic properties remain poorly elucidated. We report that costimulatory strength acts as a molecular switch, which influences the differential effects of TGFbeta1 on the effector and regulatory development of naïve CD8+ lymphocytes. At low costimulation, TGFbeta1 inhibits proliferation of CD8+ lymphocytes and cytokine secretion, but at high costimulation the response to TGFbeta1 is quite different. High costimulation combined with TGFbeta1 generates CD8+CD25+ T lymphocytes which maintain robust proliferative and survival capacity in the presence of low IL-2 concentrations. Furthermore, under these conditions, a subpopulation of CD8+ T lymphocytes is generated that express Foxp3, secrete IL-10, and inhibit naïve T lymphocyte proliferation via a contact-dependent mechanism. The adoptive transfer of these CD8+CD25+Foxp3+ T cells into mice inoculated intravenously with B16F10 melanoma appears to accelerate tumor progression as reflected by an increase in the number of pulmonary metastatic tumor foci. These findings indicate that costimulatory strength may act as a molecular switch in the generation of CD8+ T cells which possess a regulatory phenotype and the capacity to reduce antitumor immune responses within tumor-bearing mice.