Mesenchymal stem cells (MSCs) are multipotent cells found in several adult tissues. Transplanted allogeneic MSCs can be detected in recipients at extended time points, indicating a lack of immune recognition and clearance. As well, a role for bone marrow-derived MSCs in reducing the incidence and severity of graft-versus-host disease (GVHD) during allogeneic transplantation has recently been reported; however, the mechanisms remain to be investigated. We examined the immunomodulatory functions of human MSCs (hMSCs) by coculturing them with purified subpopulations of immune cells and report here that hMSCs altered the cytokine secretion profile of dendritic cells (DCs), naive and effector T cells (T helper 1 [T(H)1] and T(H)2), and natural killer (NK) cells to induce a more anti-inflammatory or tolerant phenotype. Specifically, the hMSCs caused mature DCs type 1 (DC1) to decrease tumor necrosis factor alpha (TNF-alpha) secretion and mature DC2 to increase interleukin-10 (IL-10) secretion; hMSCs caused T(H)1 cells to decrease interferon gamma (IFN-gamma) and caused the T(H)2 cells to increase secretion of IL-4; hMSCs caused an increase in the proportion of regulatory T cells (T(Regs)) present; and hMSCs decreased secretion of IFN-gamma from the NK cells. Mechanistically, the hMSCs produced elevated prostaglandin E2 (PGE(2)) in co-cultures, and inhibitors of PGE(2) production mitigated hMSC-mediated immune modulation. These data offer insight into the interactions between allogeneic MSCs and immune cells and provide mechanisms likely involved with the in vivo MSC-mediated induction of tolerance that could be therapeutic for reduction of GVHD, rejection, and modulation of inflammation.