Intestinal dendritic cells (DCs) have been shown to display specialized functions, including the ability to promote gut tropism to lymphocytes, to polarize noninflammatory responses, and to drive the differentiation of adaptive Foxp3+ regulatory T (T reg) cells. However, very little is known about what drives the mucosal phenotype of DCs. Here, we present evidence that the local microenvironment, and in particular intestinal epithelial cells (ECs), drive the differentiation of T reg-cell-promoting DCs, which counteracts Th1 and Th17 development. EC-derived transforming growth factor-β (TGF-β) and retinoic acid (RA), but not thymic stromal lymphopoietin (TSLP), were found to be required for DC conversion. After EC contact, DCs upregulated CD103 and acquired a tolerogenic phenotype. EC-conditioned DCs were capable of inducing de novo T reg cells with gut-homing properties that when adoptively transferred, protected mice from experimental colitis. Thus, we have uncovered an essential mechanism in which EC control of DC function is required for tolerance induction.