Adult mesenchymal stem cells possess a remarkably diverse array of immunosuppressive characteristics. The capacity to suppress the regular processes of allogeneic rejection, have allowed the use of tissue mismatched cells as therapeutic approaches in regenerative medicine and as agents of immune deviation. This review describes recent advances in understanding the mechanistic basis of mesenchymal stromal or stem cells (MSC) interaction with innate immunity. Particular emphasis is placed on the effect of Toll-like receptor signalling on MSC and a hypothesis that innate immune signals induce a ‘licensing switch’ in MSC is put forward. The mechanisms underlying MSC suppression of T cell responses and induction of regulatory populations are surveyed. Conflicting data regarding the influence of MSC on B cell function are outlined and discussed. Finally the limits to MSC mediated immune modulation are discussed with reference to the future clinical application of novel cell therapies.