Mesenchymal stem cells (MSCs) possess potent immunosuppression capacity and could exert strong therapeutic effects in many diseases, especially inflammatory disorders, in animal models and clinical settings. Although inflammatory cytokines are critical in inducing the immune modulatory properties of MSCs, detailed molecular mechanisms are yet to be fully understood. TGF-β is a well-known anti-inflammatory cytokine and exists in various inflammatory processes; therefore, we investigated whether it could synergize with MSCs in suppressing immune responses. To our surprise, we found that TGF-β actually reversed the immunosuppressive effect of MSCs on anti-CD3 activated splenocytes. Using TGF-β unresponsive MSCs, we demonstrated that the TGF-β directly acted on MSCs. Furthermore, we showed that the effect of TGF-β is exerted through inhibiting inflammatory cytokines induced inducible NO synthase (iNOS) expression in a SMAD3-dependent manner. Interestingly, we found that TGF-β produced by MSCs could act in an autocrine manner to reduce inflammatory cytokine-induced inducible NO synthase expression by MSCs themselves. Therefore, our study revealed a previously unrecognized property of TGF-β in promoting immune responses in the presence of MSCs.