Asthma is caused by T-helper cell 2 (Th2)-driven immune responses, but the immunological mechanisms that protect against asthma development are poorly understood. T-cell tolerance, induced by respiratory exposure to allergen, can inhibit the development of airway hyperreactivity (AHR), a cardinal feature of asthma, and we show here that regulatory T (T(R)) cells can mediate this protective effect. Mature pulmonary dendritic cells in the bronchial lymph nodes of mice exposed to respiratory allergen induced the development of T(R) cells, in a process that required T-cell costimulation via the inducible costimulator (ICOS-ICOS-ligand pathway. The T(R) cells produced IL-10, and had potent inhibitory activity; when adoptively transferred into sensitized mice, T(R) cells blocked the development of AHR. Both the development and the inhibitory function of regulatory cells were dependent on the presence of IL-10 and on ICOS-ICOS-ligand interactions. These studies demonstrate that T(R) cells and the ICOS-ICOS-ligand signaling pathway are critically involved in respiratory tolerance and in downregulating pulmonary inflammation in asthma.