Mesenchymal stem cells (MSCs) are located in postnatal bone marrow, show plasticity, are linked to various bone marrow disorders, exhibit phagocytosis, exert Ag-presenting properties (APC), and are immune suppressive. Unlike professional APCs, MSCs respond bimodally to IFN-gamma in MHC-II expression, with expression at 10 U/ml and baseline, and down-regulation at 100 U/ml. The effects at high IFN-gamma could not be explained by down-regulation of its receptor, IFN-gammaRI. In this study, we report on the mechanisms by which IFN-gamma regulates MHC-II expression in MSCs. Gel shift assay and Western blot analyses showed dose-dependent increases in activated STAT-1, indicating responsiveness by IFN-gammaRI. Western blots showed decreased intracellular MHC-II, which could not be explained by decreased transcription of the master regulator CIITA, based on RT-PCR and in situ immunofluorescence. Reporter gene assays with PIII and PIV CIITA promoters indicate constitutive expression of PIII in MSCs and a switch to PIV by IFN-gamma, indicating the presence of factors for effect promoter responses. We explained decreased MHC-II at the level of transcription because CIITA protein was observed in the cytosol and not in nuclei at high IFN-gamma level. The proline/serine/threonine region of CIITA showed significant decrease in phosphorylation at high IFN-gamma levels. An understanding of the bimodal effects could provide insights on bone marrow homeostasis, which could be extrapolated to MSC dysfunction in hematological disorders.