Transplantation of mesenchymal stem cells (MSCs) has been shown to enhance the recovery of brain functions following ischemic injury. Although immune modulation has been suggested to be one of the mechanisms, the molecular mechanisms underlying improved recovery has not been clearly identified. Here, we report that MSCs secrete transforming growth factor-beta (TGF-β) to suppress immune propagation in the ischemic rat brain. Ischemic stroke caused global death of resident cells in the infarcted area, elevated the monocyte chemoattractant protein-1 (MCP-1) level, and evoked massive infiltration of circulating CD68+ immune cells through the impaired blood-brain barrier. Transplantation of MSCs at day 3 post-ischemia blocked the subsequent upregulation of MCP-1 in the ischemic area and the infiltration of additional CD68+ immune cells. MSC-conditioned media decreased the migration and MCP-1 production of freshly isolated immune cells in vitro, and this effect was blocked by an inhibitor of TGF-β signaling or an anti-TGF-β neutralizing antibody. Finally, transplantation of TGF-β1-silenced MSCs failed to attenuate the infiltration of CD68+ cells into the ischemic brain, and was associated with only minor improvements in motor function. These results indicate that TGF-β is key to the ability of MSCs to beneficially attenuate immune reactions in the ischemic brain. Our findings offer insight into the interactions between allogeneic MSCs and the host immune system, reinforcing the prospective clinical value of using MSCs in the treatment of neurological disorders involving inflammation-mediated secondary damage.