Allogeneic mesenchymal stem or stromal cells (MSCs) are proposed as cell therapies for degenerative, inflammatory, and autoimmune diseases. The feasibility of allogeneic MSC therapies rests heavily on the concept that these cells avoid or actively suppress the immunological responses that cause rejection of most allogeneic cells and tissues. In this article the validity of the immune privileged status of allogeneic MSCs is explored in the context of recent literature. Current data that provide the mechanistic basis for immune modulation by MSCs are reviewed with particular attention to how MSCs modify the triggering and effector functions of innate and adaptive immunity. The ability of MSCs to induce regulatory dendritic and T-cell populations is discussed with regard to cell therapy for autoimmune disease. Finally, we examine the evidence for and against the immune privileged status of allogeneic MSCs in vivo. Allogeneic MSCs emerge as cells that are responsive to local signals and exert wide-ranging, predominantly suppressive, effects on innate and adaptive immunity. Nonetheless, these cells also retain a degree of immunogenicity in some circumstances that may limit MSC longevity and attenuate their beneficial effects. Ultimately successful allogeneic cell therapies will rely on an improved understanding of the parameters of MSC–immune system interactions in vivo.