Mesenchymal stem cells (MSCs) can modulate lymphocyte proliferation and function. One of the immunomodulatory functions of MSCs involves CD4+CD25+FoxP3+ regulatory T cells (Tregs), which negatively regulate inflammatory responses. MSC-mediated Treg induction is supposed to be regulated by mechanisms requiring both soluble and cell contact-dependent factors. Although the involvement of soluble factors has been revealed, the contact-dependent mechanisms in MSC-mediated Treg induction remain unclear. We attempted to identify molecule(s) other than secreted factors that are responsible for MSC-mediated Treg induction and to uncover the underlying mechanisms. Under in vitro Treg-inducing conditions, ICOSL expression in MSCs coincided with Treg induction in co-cultures of MSCs with CD4+ T cells. When cultured in a transwell plate, MSCs failed to induce Tregs. Neutralization or knockdown of ICOSL significantly reduced Tregs and their IL-10 release. ICOSL overexpression in MSCs promoted induction of functional Tregs. ICOSL-ICOS signaling promoted Treg differentiation from CD4+ T cells through activation of the phosphoinositide 3-kinase-Akt pathway. MSCs primed with Interleukin-1β significantly induced Tregs through ICOSL upregulation. We demonstrated that the Treg-inducing activity of MSCs is proportionate to their basal ICOSL expression. This study provides evidence that ICOSL expression in human MSCs plays an important role in contact-dependent regulation of MSC-mediated Treg induction.