T cells that encounter ocular pigment epithelium in vitro are inhibited from undergoing TCR-triggered activation, and instead acquire the capacity to suppress the activation of bystander T cells. Because retinal pigment epithelial (RPE) cells suppress T cell activation by releasing soluble inhibitory factors, we studied whether soluble factors also promote the generation of T regulatory (Treg) cells. We found that RPE converted CD4(+) T cells into Treg cells by producing and secreting CTLA-2alpha, a cathepsin L (CathL) inhibitor. Mouse rCTLA-2alpha converted CD4(+) T cells into Treg cells in vitro, and CTLA-2alpha small interfering RNA-transfected RPE cells failed to induce the Treg generation. RPE CTLA-2alpha induced CD4(+)CD25(+)Foxp3(+) Treg cells that produced TGFbeta in vitro. Moreover, CTLA-2alpha produced by RPE cells inhibited CathL activity in the T cells, and losing CathL activity led to differentiation to Treg cells in some populations of CD4(+) T cells. In addition, T cells in the presence of CathL inhibitor increased the expression of Foxp3. The CTLA-2alpha effect on Treg cell induction occurred through TGFbeta signaling, because CTLA-2alpha promoted activation of TGFbeta in the eye. These results show that immunosuppressive factors derived from RPE cells participate in T cell suppression. The results are compatible with the hypothesis that the eye-derived Treg cells acquire functions that participate in the establishment of immune tolerance in the posterior segment of the eye.