Multipotential stromal cells (MSCs) demonstrate strong immunomodulation capabilities following culture expansion. We have previously demonstrated that human cancellous bone fragments (CBFs) clinically used as viable allografts for spinal fusion have resident MSCs that exhibit T cell immunomodulation after monolayer expansion. This study investigated the immunomodulatory ability of these CBFs without MSC culture-expansion. CD4 positive T cells were induced to proliferate using CD3/CD28 stimulation and added to CBFs at different ratios of T cells per gram of CBF. A dose-dependent suppressive effect on T cell proliferation was evident and correlated with increased culture supernatant levels of TGF-ß1, but not PGE2. CBF-driven immunosuppression was reduced in co-cultures with TGF-ß neutralising antibodies and was higher in cell contact compared to non-contact cultures. CBF gene expression profile identified vascular cell adhesion molecule-1, bone marrow stromal antigen 2/CD317 and other interferon signalling pathway members as potential immunomodulatory mediators. The CD317 molecule was detected on the surface of CBF-resident cells confirming the gene expression data. Taken together, these data demonstrate that human clinically used CBFs are inherently immunomodulatory and suggest that these viable allografts may be used to deliver therapeutic immunomodulation for immune-related diseases.