Mesenchymal stem cells (MSCs) inhibit the proliferation of HLA-unrelated T lymphocytes to allogeneic stimulation, but the mechanisms responsible for this activity are not fully understood. We show here that MSCs suppress the proliferation of both CD4⁺ and CD8⁺ T lymphocytes, as well as of natural killer (NK) cells, whereas they do not have an effect on the proliferation of B lymphocytes. The antiproliferative effect of MSCs was not associated with any effect on the expression of cell-activation markers, induction of cell apoptosis, or mimicry/enhancement of T regulatory cell activity. The suppressive activity of MSCs was not contact-dependent and required the presence of interferon (IFN)-γ produced by activated T cells and NK cells. Accordingly, even activated B cells became susceptible to the suppressive activity of MSCs in the presence of exogenously added IFN-γ. The suppressive effect of IFN-γ was related to its ability to stimulate the production by MSCs of indoleamine 2,3-dioxygenase activity, which in turn inhibited the proliferation of activated T or NK cells. These findings suggest that the beneficial effect on graft-versus-host disease induced by in vivo coinfusion with the graft of MSCs may be due to the activation of the immunomodulatory properties of MSCs by T cell– derived IFN-γ.