Mesenchymal stromal cells (MSCs) are widely recognized to possess potent immunomodulatory activity, as well as to stimulate repair and regeneration of diseased or damaged tissue. These fundamental properties suggest important applications in hematopoietic cell transplantation. Although the mechanisms of therapeutic activity in vivo are yet to be fully elucidated, MSCs seem to suppress lymphocytes by paracrine mechanisms, including secreted mediators and metabolic modulators. Most recently, host macrophage engulfment of apoptotic MSCs has emerged as an important contributor to the immune suppressive microenvironment. Although bone marrow-derived MSCs are the most commonly studied, the tissue source of MSCs may be a critical determinant of immunomodulatory function. The key application of MSC therapy in hematopoietic cell transplantation is to prevent or treat graft-versus-host disease (GVHD). The pathogenesis of GVHD reveals multiple potential targets. Moreover, the recently proposed concept of tissue tolerance suggests a new possible mechanism of MSC therapy for GVHD. Beyond GVHD, MSCs may facilitate hematopoietic stem cell engraftment, which could gain greater importance with increasing use of haploidentical transplantation. Despite many challenges and much doubt, commercial MSC products for pediatric steroid-refractory GVHD have been licensed in Japan, conditionally licensed in Canada and New Zealand, and have been recommended for approval by an FDA Advisory Committee in the United States. Here, we review key historical data in the context of the most salient recent findings to present the current state of MSCs as adjunct cell therapy in hematopoietic cell transplantation.