Maintaining an appropriate balance between subsets of CD4(+) Th and T regulatory cells (Tregs) is critical to maintain immune homeostasis and prevent autoimmunity. Through a common requirement for TGF-beta, the development of peripherally induced Tregs is intimately linked to that of Th17 cells, with the resulting lineages depending on the presence of proinflammatory cytokines such as IL-6. Currently very little is known about the molecular signaling pathways that control the development of Tregs vs Th17 cells. Reduced activity of the PI3K pathway is required for TGF-beta-mediated induction of Foxp3 expression and the suppressive activity of Tregs. To investigate how negative regulators of the PI3K pathway impact Treg development, we investigated whether SHIP, a lipid phosphatase that regulates PI3K activity, also plays a role in the development and function of Tregs. SHIP-deficient Tregs maintained suppressive capacity in vitro and in a T cell transfer model of colitis. Surprisingly, SHIP-deficient Th cells were significantly less able to cause colitis than were wild-type Th cells due to a profound deficiency in Th17 cell differentiation, both in vitro and in vivo. The inability of SHIP-deficient T cells to develop into Th17 cells was accompanied by decreased IL-6-stimulated phosphorylation of STAT3 and an increased capacity to differentiate into Treg cells under the influence of TGF-beta and retinoic acid. These data indicate that SHIP is essential for normal Th17 cell development and that this lipid phosphatase plays a key role in the reciprocal regulation of Tregs and Th17 cells.