Human bone marrow-derived mesenchymal cells (MSCs) are precursors of nonhematopoietic mesenchymal cells of the bone marrow microenvironment. MSCs were shown to inhibit alloreactive T lymphocytes, but the mechanism and mediators of this effect are not fully understood. Here we describe a novel interaction between blood monocytes and bone marrow-derived, culture-expanded MSCs, which results in inhibition of T-lymphocyte activation. We found that CD14+ monocytes from blood activate MSCs to secrete inhibitory molecules that lead to inhibition of alloreactive T cells. This cellular communication is not contact-dependent, but rather is mediated by soluble factors that include interleukin (IL)-1beta. MSC-mediated inhibition of alloreactive T lymphocytes is associated with downregulation of activation markers CD25, CD38, and CD69 detected both in CD4+ and CD8+ T lymphocytes. The cytokines secreted by MSCs that mediate T-cell inhibition include transforming growth factor-beta1, but not IL-10. The interaction between blood monocytes and the MSCs represents a unique immune regulatory paradigm that can potentially be exploited in clinic.