Bone mesenchymal stem cells (BMSC) are attractive not only in regenerative medicine, but also for the treatment of autoimmune diseases and graft-versus-host disease. BMSC also play a role in enabling alloantigen tolerance. An in-depth mechanistic understanding of this phenomenon of tolerance could lead to novel cell-based therapies for autoimmune disease. We demonstrate here that co-culture of mature dendritic cells (DC) with BMSC in a transwell system (BMSC-DC) downregulated expression of the maturation marker, CD83 and CD80/86 co-stimulatory molecules on DC, while increasing their endocytic activity. This resulted in defective antigen presentation and co-stimulatory capacity of mature DC. Functionally, BMSC-DC have impaired T-cell stimulatory activity in a mixed lymphocyte reaction and orchestrate a shift from predominantly pro-inflammatory T-helper (Th)-1 to anti-inflammatory Th2 cells. While the expression of MHC II, CD80 and CD86 were upregulated on BMSC co-cultured with DC, these BMSC lacked the ability to stimulate T-cell proliferation. Taken together, these data suggest that the interaction between BMSC and DC modulates the immunoregulatory function of these cells in a coordinated manner, effectively skewing the immune response towards T-cell tolerance.