Rotator cuff injuries are a common clinical problem either as a result of overuse or aging. Biological approaches to tendon repair that involve use of scaffolding materials or cell-based approaches are currently being investigated. The cell-based approaches are focused on applying multipotent mesenchymal stem cells (MSCs) mostly harvested from bone marrow. In the present study, we focused on characterizing cells harvested from tissues associated with rotator cuff tendons based on an assumption that these cells would be more appropriate for tendon repair. We isolated MSCs from bursa tissue associated with rotator cuff tendons and characterized them for multilineage differentiation in vitro and in vivo. Human bursa was obtained from patients undergoing rotator cuff surgery and cells within were isolated using collagenase and dispase digestion. The cells isolated from the tissues were characterized for osteoblastic, adipogenic, chondrogenic, and tenogenic differentiation in vitro and in vivo. The results showed that the cells isolated from bursa tissue exhibited MSCs characteristics as evidenced by the expression of putative cell surface markers attributed to MSCs. The cells exhibited high proliferative capacity and differentiated toward cells of mesenchymal lineages with high efficiency. Bursa-derived cells expressed markers of tenocytes when treated with bone morphogenetic protein-12 (BMP-12) and assumed aligned morphology in culture. Bursa cells pretreated with BMP-12 and seeded in ceramic scaffolds formed extensive bone, as well as tendon-like tissue in vivo. Bone formation was demonstrated by histological analysis and immunofluorescence for DMP-1 in tissue sections made from the scaffolds seeded with the cells. Tendon-like tissue formed in vivo consisted of parallel collagen fibres typical of tendon tissues. Bursa-derived cells also formed a fibrocartilagenous tissue in the ceramic scaffolds. Taken together, the results demonstrate a new source of MSCs with a high potential for application in tendon repair.