Allogeneic hematopoietic cell transplantation (allo-HCT) is an effective therapy for hematological malignancies and inherited diseases. However, acute graft-versus-host-disease (aGVHD) is a major life-threatening complication after allo-HCT and there are few therapeutic options for severe steroid-refractory aGVHD. Preliminary studies on cotransplantation of mesenchymal stem cells (MSCs) have shown an improvement in or resolution of severe aGVHD. However, the underlying mechanism this immunosuppressive effect has not been elucidated. Most of the data suggest that this immunosuppressive effect involves soluble factors such as IL-6 or TGF-β as well as cell-cell contact dependence. MSCs interact either directly with T cells or indirectly via other immune cells such as dendritic cells and NK cells. Here we review the immunomodulatory function of MSCs in allo-HCT and their potential usefulness in the treatment or prevention of severe acute GVHD.