Mesenchymal stromal cells or mesenchymal stem cells (MSCs) have captured considerable scientific and public interest because of their potential to limit physical and immune injury, to produce bioactive molecules and to regenerate tissues. MSCs are phenotypically heterogeneous and distinct subpopulations within MSC cultures are presumed to contribute to tissue repair and the modulation of allogeneic immune responses. As the first example of efficacy, clinical trials for prevention and treatment of graft-versus-host disease after hematopoietic cell transplantation show that MSCs can effectively treat human disease. The view of the mechanisms whereby MSCs function as immunomodulatory and reparative cells has evolved simultaneously. Initially, donor MSCs were thought to replace damaged cells in injured tissues of the recipient. More recently, however, it has become increasingly clear that even transient MSC engraftment may exert favorable effects through the secretion of cytokines and other paracrine factors, which engage and recruit recipient cells in productive tissue repair. Thus, an important reason to investigate MSCs in mechanistic preclinical models and in clinical trials with well-defined end points and controls is to better understand the therapeutic potential of these multifunctional cells. Here, we review the controversies and recent insights into MSC biology, the regulation of alloresponses by MSCs in preclinical models, as well as clinical experience with MSC infusions (Table 1) and the challenges of manufacturing a ready supply of highly defined transplantable MSCs.