Progesterone, a key female sex hormone with pleiotropic functions in maintenance of pregnancy, has profound effects on regulation of immune responses. We report here a novel function of progesterone in regulation of naïve cord blood (CB) fetal T cell differentiation into key regulatory T cell subsets. Progesterone drives allogeneic activation-induced differentiation of CB naive, but not adult peripheral blood (PB), T cells into immune suppressive T regulatory cells (Tregs), many of which express FoxP3. Compared to 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 antigen presenting cells were more efficient in inducing FoxP3+ T cells than their PB counterparts. 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 while 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.