Regulatory T cells (Treg cells), characterized by FOXP3 expression, maintain immune homeostasis, but their function is impaired in autoimmune diseases such as rheumatoid arthritis (RA). Here we used single-cell RNA sequencing to analyze Treg cells in synovial tissues from patients with RA. We identified two predominant Treg states, CD25hiCXCR6pos Treg cells and dysfunctional CD25loAREGpos Treg cells, both enriched in synovial tissues but not in blood. Cortisol, activated by fibroblasts, drove AREG expression and impaired suppressive function in CD25loAREGpos Treg cells, and AREG promoted an inflammatory phenotype in synovial fibroblasts. By contrast, CD25hiCXCR6pos Treg cells remained highly suppressive and were supported by membrane-bound tumor necrosis factor (TNF)-expressing macrophages. TNFR2 engagement prevented or reversed the dysfunctional Treg cell state. These two Treg cell subsets were also observed in juvenile idiopathic arthritis, indicating shared mechanisms across inflammatory arthritis. These findings define distinct pathways driving functional and dysfunctional Treg cell states in inflamed tissues and implicate potential therapeutic strategies.