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Fulminant hepatic failure (FHF) is a clinical syndrome characterized by sudden and severe impairment of liver function. Mesenchymal stem cells (MSCs) have been proposed as a promising therapeutic approach for FHF. In this study we used Propionibacterium acnes (P. acnes)-primed, lipopolysaccharide (LPS)-induced liver injury in mice as an animal model of human FHF. We demonstrated that administration of MSCs significantly ameliorated liver injury and improved the survival rates of mice subjected to P. acnes plus LPS-induced FHF. Allogeneic MSCs showed similar treatment efficacy as autologous MSCs did in FHF. Treatment efficacy of MSCs could be attributed to decreased infiltration and activation of CD4+ T cells in the liver, inhibition of T helper 1 cells, and induction of regulatory T cells (Tregs). Moreover, decreased DNA copies of P. acnes were detected in the liver of MSC-treated mice. Intriguingly, a distinct liver population of CD11c+MHCIIhiCD80loCD86lo regulatory dendritic cells (DCs) was induced by MSCs. Moreover, these DCs induced Treg differentiation through transforming growth factor-β production. Further mechanistic studies demonstrated that MSC-derived prostaglandin E2 and one of its receptors, EP4, played essential roles in the differentiation of CD11c+B220 DC precursors into regulatory DCs in a phosphoinositide 3-kinase-dependent manner. Conclusion: MSCs induce regulatory DCs from CD11c+B220 DC precursors. This study elucidates an immunoregulatory mechanism of MSCs and lays a foundation for application of MSCs in FHF therapy. (Hepatology 2014;59:671–682)