A considerable amount of retrospective data is available that describes putative mesenchymal stem cells (MSCs). However, there is still very little knowledge available that documents the properties of a MSC in its native environment. Although the precise identity of MSCs remains a challenge, further understanding of their biological properties will be greatly advanced by analyzing the mechanisms that govern their self-renewal and differentiation potential. This review begins with the current state of knowledge on the biology of MSCs, specifically with respect to their existence in the adult organism and postulation of their biological niche. While MSCs are considered suitable candidates for cell-based strategies owing to their intrinsic capacity to self-renew and differentiate, there is currently little information available regarding the molecular mechanisms that govern their stem cell potential. We propose here a model for the regulation of MSC differentiation, and recent findings regarding the regulation of MSC differentiation are discussed. Current research efforts focused on elucidating the mechanisms regulating MSC differentiation should facilitate the design of optimal in vitro culture conditions to enhance their clinical utility cell and gene therapy.