Progesterone, a key female sex hormone with pleiotropic functions in maintenance of pregnancy, has profound effects on regulation of immune responses. We report in this work a novel function of progesterone in regulation of naive cord blood (CB) fetal T cell differentiation into key T regulatory cell (Treg) subsets. Progesterone drives allogeneic activation-induced differentiation of CB naive, but not adult peripheral blood, T cells into immune-suppressive Tregs, many of which express FoxP3. Compared with those induced in the absence of progesterone, the FoxP3(+) T cells induced in the presence of progesterone highly expressed memory T cell markers. In this regard, the Treg compartment in progesterone-rich CB is enriched with memory-type FoxP3(+) T cells. Moreover, CB APCs were more efficient than their peripheral blood counterparts in inducing FoxP3(+) T cells. Another related function of progesterone that we discovered was to suppress the differentiation of CB CD4(+) T cells into inflammation-associated Th17 cells. Progesterone enhanced activation of STAT5 in response to IL-2, whereas it decreased STAT3 activation in response to IL-6, which is in line with the selective activity of progesterone in generation of Tregs versus Th17 cells. Additionally, progesterone has a suppressive function on the expression of the IL-6 receptor by T cells. The results identified a novel role of progesterone in regulation of fetal T cell differentiation for promotion of immune tolerance.