Embryonic stem (ES) cells are a promising donor source for transplantation therapy, but several problems must be solved before they can be clinically useful. One of these is the host immune reaction to allogeneic grafts. In this article, we examine the effect of the host immune reaction on survival and differentiation of grafted ES cell–derived neural precursor cells (NPCs). We induced NPCs from mouse ES cells by stromal cell–derived inducing activity and then transplanted them into mouse brains with or without administering the immunosuppressant cyclosporine A (CsA). Two and 8 weeks following transplantation, the accumulation of host‐derived microglia/macrophages and lymphocytes was observed around the graft. This effect was reduced by CsA treatment, although no significant difference in graft volume was observed. These data suggest that an immune response occurs in allografts of ES cell–derived NPCs. Intriguingly, however, the ratio of neurons to astrocytes in the graft was higher in immunosuppressed mice. Because inflammatory or immune cells produce various cytokines, we examined the effect of IL‐1β, IL‐6, IFN‐γ, and TNF‐α on the differentiation of NPCs in vitro. Only IL‐6 promoted glial cell fate, and this effect could be reversed by the addition of an IL‐6 neutralizing antibody. These results suggest that allogeneic ES cell–derived NPCs can cause an immune response by the host brain, but it is not strong enough to reject the graft. More important, activated microglia and lymphocytes can suppress neuronal differentiation of grafted NPCs in vivo by producing cytokines such as IL‐6. © 2008 Wiley‐Liss, Inc.