The immunomodulatory capacity of mesenchymal stem cells (MSCs) is critical for their use in therapeutic applications. MSC response to specific inflammatory cues allows them to switch between a proinflammatory (MSC1) or anti‐inflammatory (MSC2) phenotype. Regulatory mechanisms controlling this switch remain to be defined. One characteristic feature of MSC2 is their ability to respond to IFNγ with induction of indoleamine 2,3‐dioxygenase (IDO), representing the key immunoregulatory molecule released by human MSC. Here, we show that STAT1 and PI3Kα pathways interplay regulates IFNγ‐induced IDO production in MSC. Chemical phosphoinositide 3‐kinase (PI3K) pan‐inhibition, PI3Kα‐specific inhibition or shRNA knockdown diminished IFNγ‐induced IDO production. This effect involved PI3Kα‐mediated upregulation of STAT1 protein levels and phosphorylation at Ser727. Overexpression of STAT1 or of a constitutively active PI3Kα mutant failed to induce basal IDO production, but shifted MSC into an MSC2‐like phenotype by strongly enhancing IDO production in response to IFNγ as compared to controls. STAT1 overexpression strongly enhanced MSC‐mediated T‐cell suppression. The same effect could be induced using short‐term pretreatment of MSC with a chemical inhibitor of the counter player of PI3K, phosphatase and tensin homolog. Finally, downregulation of STAT1 abrogated the immunosuppressive capacity of MSC. Our results for the first time identify critical upstream signals for the induced production of IDO in MSCs that could be manipulated therapeutically to enhance their immunosuppressive phenotype. Stem Cells  2015;33:1892–1901