The unique immunomodulatory properties of mesenchymal stem cells (MSCs) make them an invaluable cell type for the repair of tissue/organ damage caused by chronic inflammation or autoimmune disorders. Although they hold great promise in the treatment of immune disorders such as graft versus host disease (GvHD) and allergic disorders, there remain many challenges to overcome before their widespread clinical application. An understanding of the biological properties of MSCs will clarify the mechanisms of MSC-based transplantation for immunomodulation. In this review, we summarize the preclinical and clinical studies of MSCs from different adult tissues, discuss the current hurdles to their use and propose the future development of pluripotent stem cell-derived MSCs as an approach to immunomodulation therapy.