VAF347 is a low-molecular-weight compound, which activates the aryl hydrocarbon receptor (AhR). Herein, we report that oral administration of a water-soluble derivative of VAF347 (VAG539) promotes long-term graft acceptance and active tolerance in Balb/c mice that receive a transplant of MHC-mismatched pancreatic islet allografts. In vivo VAG539 treatment results in increased frequency of splenic CD4⁺ T cells expressing CD25 and Foxp3, markers associated with regulatory T (Tr) cells, and in vitro VAF347 treatment of splenic CD4⁺ T cells improved CD4⁺CD25⁺Foxp3⁺ T-cell survival. Interestingly, transfer of CD11c⁺ dendritic cells (DCs), but not of CD4⁺ T or CD19⁺ B cells, from VAG539-treated long-term tolerant hosts into mice that recently underwent transplantation resulted in donor (C57Bl/6)–specific graft acceptance and in a significantly higher frequency of splenic CD4⁺CD25⁺Foxp3⁺ Tr cells. Furthermore, the transfer of CD4⁺CD25⁺ T cells from these mice into mice that recently underwent transplantation promoted graft acceptance. Similarly, cell therapy with in vitro VAF347-treated bone marrow–derived mature DCs prevented islet graft rejection, and reduced OVA-specific T-cell responses in OVA-immunized mice. Collectively, our data indicate that AhR activation induces islet allograft–specific tolerance through direct as well as DC-mediated effects on Tr-cell survival and function.