The cellular origin, in vivo function and fate of donor bone marrow-derived cells residing in the recipient intestinal epithelial cells, pericryptal myofibroblasts or endothelial cells remain obscure. Although 'immunoprivileged' mesenchymal stem cells (MSCs) are prime candidates for cell- and gene-based therapy, their precise role in colitis remains largely undetermined. Using a dextran sulphate sodium (DSS) colitis with busulphan (BU)-induced hypoplastic marrow model, we examined the therapeutic effects of MSC transplantation, focusing on the role of MSCs as both cell providers and immunomodulators. Donor-derived MSCs were detected by eGFP immunofluorescence and fluorescence in situ hybridization for Y-chromosome (Y-FISH) analysis. Western blot analysis of apical-most tight junction proteins was performed with antibodies against claudin-2, -7, -8, -12, -13, -15 and ZO-1. Cytokine and cell cycle profiles were analysed by semi-quantitative RT-PCR and flow cytometry. Susceptibility to DSS colitis was significantly increased by co-existing BU-induced bone marrow hypoplasia and this increase was significantly reduced by enhancing epithelial engraftment of MSCs, an effect depending on restoring epithelial barrier integrity rather than inhibiting host immune responses. We provide evidence that implicates MSCs in maintaining epithelial barrier function by reassembling apical-most tight junction proteins, claudins. The therapeutic efficacy of extrinsic MSCs depends on enhancing epithelial engraftment in damaged crypts by busulphan conditioning. Such a role for the MSC-derived intestinal cells in colitis therapy merits further examination and may offer a promising new treatment for inflammatory bowel disease (IBD).