Dendritic cell (DC) modification is a potential strategy to induce clinical transplantation tolerance. We compared two DC modification strategies to inhibit allogeneic T‐cell proliferation. In the first strategy, murine DCs were transduced with a lentiviral vector expressing CTLA4‐KDEL, a fusion protein that prevents surface CD80/86 expression by retaining the co‐stimulatory molecules within the ER. In the second approach, DCs were transduced to express the tryptophan‐catabolising enzyme IDO. CTLA4‐KDEL‐expressing DCs induced anergy in alloreactive T cells and generated both CD4+CD25+ and CD4+CD25−Treg cells (with direct and indirect donor allospecificity and capacity for linked suppression) both in vitro and in vivo. In contrast, T‐cell unresponsiveness induced by IDO+DCs lacked donor specificity. In the absence of any immunosuppressive treatment, i.v. administration of CTLA4‐KDEL‐expressing DCs resulted in long‐term survival of corneal allografts only when the DCs were capable of indirect presentation of alloantigen. This study demonstrates the therapeutic potential of CTLA4‐KDEL‐expressing DCs in tolerance induction.