It is increasingly recognized that immunomodulation represents an important mechanism underlying the benefits of many stem cell therapies, rather than the classical paradigm of transdifferentiation and cell replacement. In the former paradigm, the beneficial effects of cell therapy result from paracrine mechanism(s) and/or cell-cell interaction as opposed to direct engraftment and repair of diseased tissue and/or dysfunctional organs. Depending on the cell type used, components of the secretome, including microRNA (miRNA) and extracellular vesicles, may be able to either activate or suppress the immune system even without direct immune cell contact. Mesenchymal stromal cells (MSCs), also referred to as mesenchymal stem cells, are found not only in the bone marrow, but also in a wide variety of organs and tissues. In addition to any direct stem cell activities, MSCs were the first stem cells recognized to modulate immune response, and therefore they will be the focus of this review. Specifically, MSCs appear to be able to effectively attenuate acute and protracted inflammation via interactions with components of both innate and adaptive immune systems. To date, this capacity has been exploited in a large number of preclinical studies and MSC immunomodulatory therapy has been attempted with various degrees of success in a relatively large number of clinical trials. Here, we will explore the various mechanism employed by MSCs to effect immunosuppression as well as review the current status of its use to treat excessive inflammation in the context of acute lung injury (ALI) and sepsis in both preclinical and clinical settings.