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Abstract Background Corneal stromal stem cells (CSSC) reduce corneal inflammation, prevent fibrotic scarring, and regenerate transparent stromal tissue in injured corneas. These effects rely on factors produced by CSSC to block the fibrotic gene expression. This study investigated the mechanism of the scar-free regeneration effect. Methods Primary human CSSC (hCSSC) from donor corneal rims were cultivated to passage 3 and co-cultured with mouse macrophage RAW264.7 cells induced to M1 pro-inflammatory phenotype by treatment with interferon-γ and lipopolysaccharides, or to M2 anti-inflammatory phenotype by interleukin-4, in a Transwell system. The time-course expression of human transforming growth factor β3 (hTGFβ3) and hTGFβ1 were examined by immunofluorescence and qPCR. TGFβ3 knockdown for > 70% in hCSSC [hCSSC-TGFβ3(si)] was achieved by small interfering RNA transfection. Naïve CSSC and hCSSC-TGFβ3(si) were transplanted in a fibrin gel to mouse corneas, respectively, after wounding by stromal ablation. Corneal clarity and the expression of mouse inflammatory and fibrosis genes were examined. Results hTGFβ3 was upregulated by hCSSC when co-cultured with RAW cells under M1 condition. Transplantation of hCSSC to wounded mouse corneas showed significant upregulation of hTGFβ3 at days 1 and 3 post-injury, along with the reduced expression of mouse inflammatory genes (CD80, C-X-C motif chemokine ligand 5, lipocalin 2, plasminogen activator urokinase receptor, pro-platelet basic protein, and secreted phosphoprotein 1). By day 14, hCSSC treatment significantly reduced the expression of fibrotic and scar tissue genes (fibronectin, hyaluronan synthase 2, Secreted protein acidic and cysteine rich, tenascin C, collagen 3a1 and α-smooth muscle actin), and the injured corneas remained clear. However, hCSSC-TGFβ3(si) lost these anti-inflammatory and anti-scarring functions, and the wounded corneas showed intense scarring. Conclusion This study has demonstrated that the corneal regenerative effect of hCSSC is mediated by TGFβ3, inducing a scar-free tissue response.