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Mesenchymal stem cells (MSC) are a type of multipotent progenitor cell, originally isolated from the bone marrow. In addition to multilineage differentiation and participation in the hematopoietic niche, they exert powerful immunomodulatory effects, which include inhibition of proliferation and function of T cells, B cells, and natural killer cells. These unique properties make MSC of great interest for clinical applications in tissue engineering and immunosuppression. Underlying the MSC-mediated immunomodulatory mechanisms is a nonspecific antiproliferative effect, which is the consequence of cyclin D2 inhibition. Of special interest are the molecular mechanisms, by which MSC influence their target cells. Several studies have been conducted in this field, and the current data suggest roles for indoleamine 2,3-dioxygenase, prostaglandin E2, nitric oxide, histocompatibility locus antigen-G, insulin-like growth factor-binding proteins, and tolerogenic antigen-presenting cells. Understanding these mechanisms is crucial for future use of MSC in research and clinical applications.