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Mesenchymal stromal cells (MSCs) are multipotent progenitor cells that can be isolated and expanded from various sources. MSCs modulate the function of immune cells, including T and B lymphocytes, dendritic cells, and natural killer cells. An understanding of the interaction between MSCs and the inflammatory microenvironment will provide critical information in revealing the precise in vivo mechanisms involved in MSCs-mediated therapeutic effects, and for designing more practical protocols for the clinical use of these cells. In this review we describe the current knowledge of the unique biological properties of MSCs, the immunosuppressive effects on immune-competent cells and the paracrine role of soluble factors. A summary of the participation of MSCs in preclinical and clinical studies in treating autoimmune diseases and other diseases is described. We also discuss the current challenges of their use and their potential roles in cell therapies.