In recent years, a large number of studies have contributed to our understanding of the immunomodulatory mechanisms used by multipotent mesenchymal stem cells (MSCs). Initially isolated from the bone marrow (BM), MSCs have been found in many tissues but the strong immunomodulatory properties are best studied in BM MSCs. The immunomodulatory effects of BM MSCs are wide, extending to T lymphocytes and dendritic cells, and are therapeutically useful for treatment of immune-related diseases including graft-versus-host disease as well as possibly autoimmune diseases. However, BM MSCs are very rare cells and require an invasive procedure for procurement. Recently, MSCs have also been found in fetal-stage embryo-proper and extra-embryonic tissues, and these human fetal MSCs (F-MSCs) have a higher proliferative profile, and are capable of multilineage differentiation as well as exert strong immunomodulatory effects. As such, these F-MSCs can be viewed as alternative sources of MSCs. We review here the current understanding of the mechanisms behind the immunomodulatory properties of BM MSCs and F-MSCs. An increase in our understanding of MSC suppressor mechanisms will offer insights for prevalent clinical use of these versatile adult stem cells in the near future.