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Expectations on mesenchymal stem cell (MSC) treatment are high, especially in the fields of sepsis, transplant medicine, and autoimmune diseases. Various pre-clinical studies have been conducted with encouraging results, although the mechanisms of action behind the observed immunomodulatory capacity of mesenchymal stem cells have not been fully understood. Previous studies have demonstrated that the immunomodulatory effect of MSCs is communicated via MSC-secreted cytokines and has been proven to rely on the local microenvironment as some of the observed effects depend on a pre-treatment of MSCs with inflammatory cytokines. Nonetheless, recent findings indicate that the cytokine-mediated effects are only one part of the equation as apoptotic, metabolically inactivated, or even fragmented MSCs have been shown to possess an immunomodulatory potential as well. Both cytokine-dependent and cytokine-independent mechanisms suggest a key role for regulatory T cells and monocytes in the overall pattern, but the principle as to why viable and non-viable MSCs have similar immunomodulatory capacities remains elusive. Here we review the current knowledge on cellular and molecular mechanisms involved in MSC-mediated immunomodulation and focus on the viability of MSCs, as there is still uncertainty concerning the tumorigenic potential of living MSCs.