The demethylating agent 5-azacytidine (AZA) has proven its efficacy in the treatment of myelodysplastic syndrome and acute myeloid leukemia. In addition, AZA can demethylate FOXP3 intron 1 (FOXP3i1) leading to the generation of regulatory T cells (Treg). Here, we investigated the impact of AZA on xenogeneic graft-vs.-host disease (xGVHD) and graft-vs.-leukemia effects in a humanized murine model of transplantation (human PBMCs-infused NSG mice), and described the impact of the drug on human T cells in vivo. We observed that AZA improved both survival and xGVHD scores. Further, AZA significantly decreased human T-cell proliferation as well as IFNγ and TNF-α serum levels, and reduced the expression of GRANZYME B and PERFORIN 1 by cytotoxic T cells. In addition, AZA significantly increased Treg frequency through hypomethylation of FOXP3i1 as well as increased Treg proliferation. The latter was subsequent to higher STAT5 signaling in Treg from AZA-treated mice, which resulted from higher IL-2 secretion by conventional T cells from AZA-treated mice itself secondary to demethylation of the IL-2 gene promoter by AZA. Importantly, Tregs harvested from AZA-treated mice were suppressive and stable over time since they persisted at high frequency in secondary transplant experiments. Finally, graft-vs.-leukemia effects (assessed by growth inhibition of THP-1 cells, transfected to express the luciferase gene) were not abrogated by AZA. In summary, our data demonstrate that AZA prevents xGVHD without abrogating graft-vs.-leukemia effects. These findings could serve as basis for further studies of GVHD prevention by AZA in acute myeloid leukemia patients offered an allogeneic transplantation.