IFN-γ is an important Th1 proinflammatory cytokine and has a paradoxical effect on EAE in which disease susceptibility is unexpectedly heightened in IFN-γ–deficient mice. In this study, we provide what we believe is new evidence indicating that IFN-γ is critically required for the conversion of CD4⁺CD25^– T cells to CD4⁺ Tregs during EAE. In our study, the added severity of EAE in IFN-γ knockout mice was directly associated with altered encephalitogenic T cell responses, which correlated with reduced frequency and function of CD4⁺CD25⁺Foxp3⁺ Tregs when compared with those of WT mice. It was demonstrated in both human and mouse systems that in vitro IFN-γ treatment of CD4⁺CD25^– T cells led to conversion of CD4⁺ Tregs as characterized by increased expression of Foxp3 and enhanced regulatory function. Mouse CD4⁺CD25^– T cells, when treated in vitro with IFN-γ, acquired marked regulatory properties as evidenced by suppression of EAE by adoptive transfer. These findings have important implications for the understanding of the complex role of IFN-γ in both induction and self regulation of inflammatory processes.