Mesenchymal stromal cells (MSCs) possess both immuno-privileged and immuno-inhibitory properties that contribute to their therapeutic effects. Ex vivo expansion is required to obtain sufficient cells for therapy, but might also alter their immunological properties. To date there has been no systematic study of MSC immunobiology during extended culture. Here, we demonstrate that both immuno-privilege and immunosuppressive properties of MSCs change with increasing passage. We demonstrate that although MSCs exhibit powerful immunosuppressive effects through secretion of transforming growth factor-β (TGF-β) and induction of interleukin-10, these effects are diminished by a concomitant increase in MSC immunogenicity. Interferon-γ treatment for 3 days induced extendedly cultured MSCs to express significantly higher levels of major histocompatibility complex class I. In vivo, this results in cells that induce significant delayed-type hypersensitivity reactions in allogeneic recipients. Importantly, these effects are alleviated by isolation of the transplanted MSCs using a semi-permeable barrier. Under these conditions, even MSCs cultured through as many as 14 passages still exhibit immuno-inhibitory effects in vivo. Furthermore, the levels of anti-inflammatory molecule TGF-β secreted by MSCs were maintained in the extended culture. These data shed light on the variable results of allogeneic MSCs in transplantation and suggest alternative strategies for prolonging the effect of allogeneic MSCs in cell-based therapy.