Mesenchymal stem cells (MSCs) are adult stem cells that can be isolated from most adult tissues, including bone marrow, adipose, liver, amniotic fluid, lung, skeletal muscle and kidney. The term MSC is currently being used to represent both mesenchymal stem cells and multipotent mesenchymal stromal cells. Numerous reports on systemic administration of MSCs leading to functional improvements based on the paradigm of engraftment and differentiation have been published. However, it is not only difficult to demonstrate extensive engraftment of cells, but also no convincing clinical results have been generated from phase 3 trials as of yet and prolonged responses to therapy have been noted after identification of MSCs had discontinued. It is now clear that there is another mechanism by which MSCs exert their reparative benefits. Recently, MSCs have been shown to possess immunomodulatory properties. These include suppression of T cell proliferation, influencing dendritic cell maturation and function, suppression of B cell proliferation and terminal differentiation, and immune modulation of other immune cells such as NK cells and macrophages. In terms of the clinical applications of MSCs, they are being tested in four main areas: tissue regeneration for cartilage, bone, muscle, tendon and neuronal cells; as cell vehicles for gene therapy; enhancement of hematopoietic stem cell engraftment; and treatment of immune diseases such as graft-versus-host disease, rheumatoid arthritis, experimental autoimmune encephalomyelitis, sepsis, acute pancreatitis and multiple sclerosis. In this review, the mechanisms of immunomodulatory effects of MSCs and examples of animal and clinical uses of their immunomodulatory effects are described.