Human mesenchymal stem/progenitor cells (hMSCs) repair tissues and modulate immune systems but the mechanisms are not fully understood. We demonstrated that hMSCs are activated by inflammatory signals to secrete the anti-inflammatory protein, TNF-α-stimulated gene 6 protein (TSG-6) and thereby create a negative feedback loop that reduces inflammation in zymosan-induced peritonitis. The results demonstrate for the first time that TSG-6 interacts through the CD44 receptor on resident macrophages to decrease zymosan/TLR2-mediated nuclear translocation of the NF-κB. The negative feedback loop created by MSCs through TSG-6 attenuates the inflammatory cascade that is initiated by resident macrophages and then amplified by mesothelial cells and probably other cells of the peritoneum. Because inflammation underlies many pathologic processes, including immune responses, the results may explain the beneficial effects of MSCs and TSG-6 in several disease models.