The aim of this work was to investigate the role of Mesenchymal stem cells (MSC) in the modulation of immune responses, focusing on suppression and induction of immune tolerance. To date, MSC therapy has proved beneficial for the treatment of inflammatory and autoimmune diseases, such as acute Graft versus Host Disease (aGvHD) and Crohn’s disease. However, the exact mechanisms of therapeutic benefit remain unclear. The key goals of this study were to identify the role of MSC derived soluble and contact dependent factors and how these influence innate and adaptive immune responses; to develop a novel humanised mouse model of aGvHD; and to investigate the effect of MSC therapy for the prevention or treatment of aGvHD. This study demonstrated that human MSC induced functional CD4+ CD25+ FoxP3+ T regulatory cells from a purified population of human CD4+ T cells in vitro. Induction was dependent on both soluble factors and direct cell contact. MSC derived TGFβ1 and prostaglandin E2 were involved in this induction. Murine MSC suppressed dendritic cell (DC) maturation, antigen presentation and cytokine production, inducing DC with tolerogenic attributes in vitro. MSC modulation of DC function was also dependent on direct cell contact. Blocking studies revealed that the Notch signalling pathway was essential for this process. A humanised mouse model of aGvHD based on delivery of human peripheral blood mononuclear cells (PBMC) to NOD-scid IL-2rγnull (NSG) mice was developed to allow robust exploration of the role of MSC in cell therapy. MSC therapy resulted in the dramatic reduction of liver and gut pathology and significant increased survival of NSG mice with aGvHD. Protection was dependent on the timing of MSC therapy with conventional MSC proving effective only after delayed administration. In contrast, IFNγ stimulated MSC were more potent and were effective when delivered concurrent with PBMC. The beneficial effect of MSC was not due to the induction of donor PBMC apoptosis, anergy or T regulatory cells in this model; but likely due to the inhibition of donor CD4+ T cell proliferation and the significant reduction in systemic human TNFα. These findings contribute to a broader understanding of immune regulation by MSC and provide a rational basis for ongoing and future clinical studies involving allogeneic human MSC as a cell therapy.