In addition to their well-studied self-renewal capabilities and multipotent differentiation properties, mesenchymal stem cells (MSCs) have been reported to possess profound immunomodulatory functions both in vitro and in vivo. More and more studies have shown that MSCs are capable of interacting closely with almost all subsets of immune cells, such as T cells, B cells, dendritic cells, natural killer cells, macrophages, and neutrophils etc. The immunomodulatory property of MSCs may shed light on the treatment of a variety of autoimmune and inflammation-related diseases. In this article, we will review the studies on the immunomodulatory and anti-inflammatory functions of MSCs and the mechanisms responsible for the interaction between immune cells and MSCs, which could improve the development of promising approaches for cell-mediated immune therapies.