Adult bone marrow-derived mesenchymal stem cells (MSCs) are multipotent cells that are the subject of intense investigation in regenerative medicine. In addition, MSCs possess immunomodulatory properties with therapeutic potential to prevent graft-versus-host disease (GvHD) in allogeneic hematopoietic cell transplantation. Indeed, MSCs can inhibit natural killer (NK) function, modulate dendritic cell maturation, and suppress allogeneic T-cell response. Here, we report that the nonclassic human leukocyte antigen (HLA) class I molecule HLA-G is responsible for the immunomodulatory properties of MSCs. Our data show that MSCs secrete the soluble isoform HLA-G5 and that such secretion is interleukin-10-dependent. Moreover, cell contact between MSCs and allostimulated T cells is required to obtain a full HLA-G5 secretion and, as consequence, a full immunomodulation from MSCs. Blocking experiments using neutralizing anti-HLA-G antibody demonstrate that HLA-G5 contributes first to the suppression of allogeneic T-cell proliferation and then to the expansion of CD4(+)CD25(high)FOXP3(+) regulatory T cells. Furthermore, we demonstrate that in addition to their action on the adaptive immune system, MSCs, through HLA-G5, affect innate immunity by inhibiting both NK cell-mediated cytolysis and interferon-gamma secretion. Our results provide evidence that HLA-G5 secreted by MSCs is critical to the suppressive functions of MSCs and should contribute to improving clinical therapeutic trials that use MSCs to prevent GvHD.