CD11c hi dendritic cells (DC) play an essential role during the initiation of cell-mediated immunity. Recently, CD11c loCD45RB hi DC with regulatory properties have been described. However, the origins of regulatory DC are poorly understood. Here, we show that spleen-derived stromal cells promote selective development of CD11c loCD45RB + IL-10-producing regulatory DC from lineage-negative c-kit + progenitor cells. These DC have the capacity to suppress T cell responses and induce IL-10-producing regulatory T cells in vitro and to induce antigen-specific tolerance in vivo. Furthermore, stromal cells from mice infected with Leishmania donovani more effectively supported differentiation of these highly potent regulatory DC. The ability of tissue stromal cells to direct the development of DC with a regulatory phenotype thus provides a new mechanism for local immune regulation.