Infusion of either embryonic or mesenchymal stem cells prolongs the survival of organ transplants derived from stem cell donors and prevents graft-versus-host-disease (GVHD). An in-depth mechanistic understanding of this tolerization phenomenon could lead to novel cell-based therapies for transplantation. Here we demonstrate that while human mesenchymal stem cells (hMSCs) can promote superantigen-induced activation of purified T cells, addition of antigen-presenting cells (APCs; either monocytes or dendritic cells) to the cultures inhibits the T-cell responses. This contact- and dose-dependent inhibition is accompanied by secretion of large quantities of interleukin (IL)-10 and aberrant APC maturation, which can be partially overridden by the addition of factors that promote APC maturation (ie, lipopolysaccharide [LPS] or anti-CD40 monoclonal antibody [mAb]). Thus, our data support an immunoregulatory mechanism wherein hMSCs inhibit T cells indirectly by contact-dependent induction of regulatory APCs with T-cell-suppressive properties. Our data may reveal a physiologic phenomenon whereby the development of a distinct APC population is regulated by the tissue's cellular microenvironment.