Bone marrow derived mesenchymal stem cells (MSC) have been shown to be progenitor cells for mesenchymal tissues. These cells may also provide a potential therapy for bone repair. Our previous studies showed that MSC engineered with the gene for bone morphogenetic protein 2 (BMP-2), a growth factor for bone cells, were capable of differentiating into osteoblast lineage and inducing autologous bone formation in several animal models. Culturing individual MSC for autologous implantation, however, remains problematic. The number of human MSC with osteogenic potential decreases with age, and, in certain diseases, the patient's marrow may be damaged or the healthy cells reduced in number. In this study, we used rats with a femoral segmental defect to investigate whether allogeneic BMP-2 engineered MSC would facilitate bone healing. We show that BMP-2 engineered allogeneic MSC can repair critical bone defects to the same degree as rats treated with BMP-2 engineered autologous MSC, if the allogeneic group receives short-term treatment with immunosuppressant FK506. We also show that allogeneic gene transferred MSC are directly involved in bone repair, in addition to acting as gene deliverers.