Stem cell transplantation was introduced as a mean of cell replacement therapy, but the mechanism by which it confers clinical improvement in experimental models of neurological diseases is not clear. Here, we transplanted neural precursor cells (NPCs) into the ventricles of mice at day 6 after induction of chronic experimental autoimmune encephalomyelitis (EAE), a model of multiple sclerosis (MS). Transplanted cells migrated into white matter tracts and attenuated the clinical course of disease. NPC transplantation down-regulated the inflammatory brain process at the acute phase of disease, as indicated by a reduction in the number of perivascular infiltrates and of brain CD3+ T cells, an increase in the number and proportion of regulatory T cells and a reduction in the expression of ICAM-1 and LFA-1 in the brain. Demyelination and acute axonal injury in this model are considered to result mainly from the acute inflammatory process and correlate well with the chronic neurological residua. In consequence to inhibition of brain inflammation, precursor cell transplantation attenuated the primary demyelinating process and reduced the acute axonal injury. As a result, the size of demyelinated areas and extent of chronic axonal pathology were reduced in the transplanted brains. We suggest that the beneficial effect of transplanted NPCs in chronic EAE is mediated, in part, by decreasing brain inflammation and reducing tissue injury.