Adipose tissue-derived mesenchymal stem cells (AD-MSCs), which can differentiate into several lineages, have immunomodulatory properties similar to those of bone marrow-derived MSCs. However, the specific mechanism by which the immunomodulatory effect of MSCs occurs is not clear. In this study, we isolated canine AD-MSCs (cAD-MSCs) and induced their development into adipocyte, osteocyte, and neuron-like cells. We then investigated their phenotype and cytokine expression to determine whether they were able to exert an immunomodulatory effect and what the underlying mechanisms of this effect were. cAD-MSCs expressed CD44, CD90, and MHC class I and were also partially positive for the expression of CD34; however, they did not express CD14 and CD45. In addition, they expressed the mRNA of transforming growth factor beta (TGF-beta), IL-6, IL-8, CCL2, CCL5, vascular endothelial growth factor, hepatocyte growth factor (HGF), tissue inhibitor metalloproteinase-1/2, and cyclooxygenase-2 but not that of IL-10. Further, leukocyte proliferation induced by mitogens was suppressed when they were cocultured with irradiated cAD-MSCs, as well as with culture supernatants of cAD-MSCs alone. Moreover, TNF-alpha production significantly decreased, whereas TGF-beta, IL-6, and interferon-gamma production significantly increased in cAD-MSCs that were cocultured with leukocytes. Finally, immonomodulatory factors of MSCs, such as TGF-beta, HGF, prostaglandin E2 (PGE2), and indoleamine 2, 3 dioxygenase (IDO), increased significantly in cAD-MSCs that were cocultured with leukocytes; however, the production of PGE2 and IDO showed different kinetics, and leukocyte proliferation was effectively restored by PGE2 and IDO inhibitors. Taken together, these results indicate that the immunomodulatory effects of cAD-MSCs are associated with soluble factors (TGF-beta, HGF, PGE2, and IDO). Therefore, it is suggested that cAD-MSCs have a potential therapeutic use in the treatment of immune-mediated disease.