Mesenchymal stem cells (MSCs) have been exploited as cellular vectors to treat a wide array of diseases but the mechanisms responsible for their therapeutic effect remain indeterminate. Previously, we reported that MSCs inhibit bleomycin (BLM)-induced inflammation and fibrosis within the lungs of mice. Interrogation of the MSC transcriptome identified interleukin 1 receptor antagonist (IL1RN) as a potential mediator of this effect. Fractionation studies indicated that MSCs are the principal source of IL1RN in murine bone marrow and that its expression is restricted to a unique subpopulation of cells. Moreover, MSC-conditioned media was shown to block proliferation of an IL-1α-dependent T cell line and inhibit production of TNF-α by activated macrophages in vitro. Studies conducted in mice revealed that MSC administration was more effective than recombinant IL1RN delivered via adenoviral infection or osmotic pumps in inhibiting BLM-induced increases in TNF-α, IL-1α, and IL1RN mRNA in lung, IL1RN protein in bronchoalveolar lavage (BAL) fluid, and trafficking of lymphocytes and neutrophils into the lung. Therefore, MSCs protect lung tissue from BLM-induced injury by blocking TNF-α and IL-1, two fundamental proinflammatory cytokines in lung. Identification of IL1RN-expressing human MSC subpopulations may provide a novel cellular vector for treating chronic inflammatory diseases in humans.