Adult human mesenchymal stromal or stem cells (MSC) can differentiate into a variety of cell types and are candidate cellular therapeutics in regenerative medicine. Surprisingly, these cells also display multiple potent immunomodulatory capabilities, including allosuppression, making allogeneic cell therapy a possibility. The exact mechanisms involved in regulatory T cell induction by allogeneic human MSC was examined, using purified CD4+ populations and well-characterized bone marrow-derived adult human MSC. Allogeneic MSC were shown to induce forkhead box P3 (FoxP3)+ and CD25+ mRNA and protein expression in CD4+ T cells. This phenomenon required direct contact between MSC and purified T cells, although cell contact was not required for MSC induction of FoxP3 expression in an unseparated mononuclear cell population. In addition, through use of antagonists and neutralizing antibodies, MSC-derived prostaglandins and transforming growth factor (TGF)-beta1 were shown to have a non-redundant role in the induction of CD4+CD25+FoxP3+ T cells. Purified CD4+CD25+ T cells induced by MSC co-culture expressed TGF-beta1 and were able to suppress alloantigen-driven proliferative responses in mixed lymphocyte reaction. These data clarify the mechanisms of human MSC-mediated allosuppression, supporting a sequential process of regulatory T cell induction involving direct MSC contact with CD4+ cells followed by both prostaglandin E(2) and TGF-beta1 expression. Overall, this study provides a rational basis for ongoing clinical studies involving allogeneic MSC.