Bone marrow mesenchymal stem cells (MSC) have potent immunosuppressive properties and have been advocated for therapeutic use in humans. The nature of their suppressive capacity is poorly understood but is said to be a primitive stem cell function. Demonstration that adult stromal cells such as fibroblasts (Fb) can modulate T cells would have important implications for immunoregulation and cellular therapy. In this report, we show that dermal Fb inhibit allogeneic T cell activation by autologously derived cutaneous APCs and other stimulators. Fb mediate suppression through soluble factors, but this is critically dependent on IFN-gamma from activated T cells. IFN-gamma induces IDO in Fb, and accelerated tryptophan metabolism is at least partly responsible for suppression of T cell proliferation. T cell suppression is reversible, and transient exposure to Fb during activation reprograms T cells, increasing IL-4 and IL-10 secretion upon restimulation. Increased Th2 polarization by stromal cells is associated with amelioration of pathological changes in a human model of graft-vs-host disease. Dermal Fb are highly clonogenic in vitro, suggesting that Fb-mediated immunosuppression is not due to outgrowth of rare MSC, although dermal Fb remain difficult to distinguish from MSC by phenotype or transdifferentiation capacity. These results suggest that immunosuppression is a general property of stromal cells and that dermal Fb may provide an alternative and accessible source of cellular therapy.