Human adipose tissue stromal/stem cells (ASCs) are known to induce proliferation of resting T cells under ambient (21%) O2 conditions; however, ASCs exist physiologically under lower oxygen (5% O2) conditions in adipose tissue. The effects of low oxygen levels on ASC immunomodulation of T cells are unknown. In this study, we show that ASCs stimulated proliferation of naive CD4(+) T cells and the percentage of CD25(+) T cells was significantly increased under both low and ambient O2. Forkhead box P3 (FoxP3) and transforming growth factor beta (TGF-β) mRNA expression were significantly increased when ASCs were cocultured with CD4(+) T cells under low compared with ambient O2 conditions. The low O2-induced regulatory T cells (iTregs) exhibited functionality when added to mixed lymphocyte reactions as demonstrated by inhibition of peripheral blood mononuclear cell proliferation, and by >300-fold increase in FoxP3 mRNA, and >2-fold increase in TGF-β mRNA expression. These results demonstrate that under physiologically relevant low O2 conditions, direct contact of human ASCs with naive CD4(+) T cells induced functional iTregs.