Mesenchymal stem cells (MSCs) may be derived from adult bone marrow, fat, and several fetal tissues. In vitro, MSCs can be expanded and have the capacity to differentiate into several mesenchymal tissues, such as bone, cartilage, and fat. They escape the immune system in vitro, and this may make them candidates for cellular therapy in an allogeneic setting. They also have immunomodulatory effects, inhibit T-cell proliferation in mixed lymphocyte cultures, prolong skin allograft survival, and may decrease graft-versus-host disease (GVHD) when cotransplanted with hematopoietic stem cells. MSCs induce their immunosuppressive effect via a soluble factor. Some candidates have been suggested, and various mechanisms have also been suggested, although contradictory data exist; this may be due to differences in the cells and systems tested. A major problem has been that it has been difficult to identify and isolate MSCs after transplantation in vivo. However, MSCs seem to enhance hematopoietic engraftment in recipients of autologous and allogeneic grafts. Recently, they were found to reverse grade IV acute GVHD of the gut and liver. No tolerance was induced, however. Controlled studies are warranted. Thus, in allogeneic stem cell transplantation, MSCs may be used for hematopoiesis enhancement, as GVHD prophylaxis, and for the treatment of severe acute GVHD. They are also of potential use in the treatment of organ transplant rejection and in autoimmune inflammatory bowel disorders where immunomodulation and tissue repair are needed.