Background: Lepromatous leprosy caused by Mycobacterium leprae is associated with antigen specific T cell unresponsiveness/anergy whose underlying mechanisms are not fully defined. We investigated the role of CD25+FOXP3+ regulatory T cells in both skin lesions and M.leprae stimulated PBMC cultures of 28 each of freshly diagnosed patients with borderline tuberculoid (BT) and lepromatous leprosy (LL) as well as 7 healthy household contacts of leprosy patients and 4 normal skin samples. Methodology/Principle Findings: Quantitative reverse transcribed PCR (qPCR), immuno-histochemistry/flowcytometry and ELISA were used respectively for gene expression, phenotype characterization and cytokine levels in PBMC culture supernatants. Both skin lesions as well as in vitro antigen stimulated PBMC showed increased percentage/mean fluorescence intensity of cells and higher gene expression for FOXP3+, TGF-β in lepromatous (p<0.01) as compared to tuberculoid leprosy patients. CD4+CD25+FOXP3+ T cells (Tregs) were increased in unstimulated basal cultures (p<0.0003) and showed further increase in in vitro antigen but not mitogen (phytohemaglutinin) stimulated PBMC (iTreg) in lepromatous as compared to tuberculoid leprosy patients (p<0.002). iTregs of lepromatous patients showed intracellular TGF-β which was further confirmed by increase in TGF-β in culture supernatants (p<0.003). Furthermore, TGF-β in iTreg cells was associated with phosphorylation of STAT5A. TGF-β was seen in CD25+ cells of the CD4+ but not that of CD8+ T cell lineage in leprosy patients. iTregs did not show intracellular IFN-γ or IL-17 in lepromatous leprosy patients. Conclusions/Significance: Our results indicate that FOXP3+ iTregs with TGF-β may down regulate T cell responses leading to the antigen specific anergy associated with lepromatous leprosy. Author Summary: Lepromatous leprosy is a generalized infectious disease caused by Mycobacterium leprae with the patients showing T cell mediated unresponsiveness to the pathogen and chronicity of lesions. The causation of unresponsiveness and anergy in this form of leprosy is not fully understood. The recent discovery of CD25+FOXP3+ cells with regulatory functions (Tregs) in mice and man have made it possible to study their role in the dampening of T cell responses in lepromatous leprosy. We investigated both skin and PBMC from leprosy patients for lineage specific molecular, and phenotypic markers of Tregs as well as cytokines in situ and in in vitro M.leprae stimulated PBMC cultures (iTreg). Our studies find an increase in lineage specific CD4+ iTregs in lepromatous leprosy as compared to the limited form of borderline tuberculoid leprosy. Such cells secrete TGF-β, an inhibitory cytokine and may play a role in negatively regulating the T cell immune responses in lepromatous disease. [ABSTRACT FROM AUTHOR]