Mesenchymal stem cell (MSC)-based therapies may aid in the repair of articular cartilage defects. The purpose of this study was to investigate the effects of intraarticular injection of allogeneic MSCs in an in vivo anterior cruciate ligament transection (ACLT) model of osteoarthritis in rabbits. Allogeneic bone marrow-derived MSCs were isolated and cultured under hypoxia (1% O2). After 8 weeks following ACLT, MSCs suspended in hyaluronic acid (HA) were injected into the knees, and the contralateral knees were injected with HA alone. Additional controls consisted of a sham operation group as well as an untreated osteoarthritis group. The tissues were analyzed by macroscopic examination as well as histologic and immunohistochemical methods at 6 and 12 weeks post-transplantation. At 6 and 12 weeks, the joint surface showed less cartilage loss and surface abrasion after MSC injection as compared to the tissues receiving HA injection alone. Significantly better histological scores and cartilage content were observed with the MSC transplantation. Furthermore, engraftment of allogenic MSCs were evident in surface cartilage. Thus, injection of the allogeneic MSCs reduced the progression of osteoarthritis in vivo.