Infusion of either embryonic or mesenchymal stem cells prolongs the survival of organ transplants derived from stem cell donors and prevents graft-versus-host-disease (GVHD). An in-depth mechanistic understanding of this tolerization phenomenon could lead to novel cell-based therapies for transplantation. Here we demonstrate that while human mesenchymal stem cells (hMSCs) can promote superantigen-induced activation of purified T cells, addition of antigen-presenting cells (APCs; either monocytes or dendritic cells) to the cultures inhibits the T-cell responses. This contact- and dose-dependent inhibition is accompanied by secretion of large quantities of interleukin (IL)–10 and aberrant APC maturation, which can be partially overridden by the addition of factors that promote APC maturation (ie, lipopolysaccharide [LPS] or anti-CD40 monoclonal antibody [mAb]). Thus, our data support an immunoregulatory mechanism wherein hMSCs inhibit T cells indirectly by contact-dependent induction of regulatory APCs with T-cell–suppressive properties. Our data may reveal a physiologic phenomenon whereby the development of a distinct APC population is regulated by the tissue's cellular microenvironment.