Deficiency in the TGF-β-induced regulatory T (iTreg) cell differentiation is associated with compromised immune homeostasis and plays a key role in many autoimmune diseases. Therapeutic intervention to enhance in situ iTreg differentiation has become a promising treatment modality for autoimmune diseases. Here we describe that the development of autoimmune inflammation in experimental autoimmune encephalomyelitis (EAE) is associated with selective impairment of iTreg differentiation largely due to the increased production of TNF-α. The neutralization of TNF-α markedly increases iTreg differentiation, leading to the amelioration of EAE, whereas the depletion of iTreg cells abolishes the therapeutic effect of an anti-TNF-α antibody. The inhibition of iTreg differentiation by TNF-α is mediated through a signaling cascade involving the induction of TNF receptor II (TNFR2) expression and the activation of Akt. The activated Akt in turn interacts with Smad3, resulting in the inhibition of TGF-β-induced Smad3 phosphorylation and consequently the reduction of p-Smad3 results in the decreased binding to the specific binding site of the foxp3 promoter, and finally foxp3 transcription itself. Interestingly, this regulatory pathway is iTreg cell specific as TNF-α does not activate Akt in naturally occurring regulatory T cells, therefore conferring a selective effect of TNF-α and its antagonism on iTreg cells. The study sheds new light on the critical role and underlying mechanism of TNF-α in the regulation of iTreg differentiation and provides a novel rationale for TNF-α antagonistic therapy for autoimmune diseases.