Mesenchymal stem cells (MSCs) possess a strong immunosuppressive effect in vitro and in vivo in both animals and humans. However, the mechanisms that govern these immune modulatory functions of MSCs remain largely elusive. Previous studies with bulk populations of MSCs indicate that soluble factors such as PGE2 and TGFbeta are important, while others support a role for cell-cell contact. We examined immunosuppressive effects of cloned MSCs derived from mouse bone marrow and showed that the majority of these clones were able to differentiate into adipocytes and osteoblast-like cells. Importantly, we have shown them to potently inhibit TCR-triggered proliferation and cytokine production of freshly-isolated T cells. In vivo, injection of MSCs prevented the rejection of allogeneic skin transplants, reduced graft versus host disease and suppressed antigen-specific DTH responses in mice. The immunosuppressive effect of MSCs requires the interaction with activated T cells, but independent of IDO, PGE2 and TGFβ. We also investigated the effect of MSCs on lymphocyte survival. We found that MSCs inhibit apoptosis of splenocytes and thymocytes as well as purified T and B cells in absence of inflammatory cytokines. The protective effect of MSCs was absent when lymphocytes were not in contact with MSCs, indicating that the anti-apoptotic effect is exerted through direct interaction between MSCs and lymphocytes. Interestingly, this anti-apoptotic effect could be inhibited by neutralization of IL-6. Consequently, we found that the expression of IL-6 by MSCs was augmented by contact with lymphocytes. Taking together, our data show that MSCs can significantly affect the immune system and the end results are dependent on the availability of inflammatory cytokines.