Implantation of bone-marrow-derived MSCs (mesenchymal stem cells) has emerged as a potential treatment modality for liver failure, but in vivo differentiation of MSCs into functioning hepatocytes and its therapeutic effects have not yet been determined. We investigated MSC differentiation process in a rat model of TAA (thioacetamide)-induced liver cirrhosis. Male Sprague—Dawley rats were administered 0.04% TAA-containing water for 8 weeks, MSCs were injected into the spleen for transsplenic migration into the liver, and liver tissues were examined over 3 weeks. Ingestion of TAA for 8 weeks induced micronodular liver cirrhosis in 93% of rats. Injected MSCs were diffusely engrafted in the liver parenchyma, differentiated into CK19 (cytokeratin 19)- and thy1-positive oval cells and later into albumin-producing hepatocyte-like cells. MSC engraftment rate per slice was measured as 1.0–1.6%. MSC injection resulted in apoptosis of hepatic stellate cells and resultant resolution of fibrosis, but did not cause apoptosis of hepatocytes. Injection of MSCs treated with HGF (hepatocyte growth factor) in vitro for 2 weeks, which became CD90-negative and CK18-positive, resulted in chronological advancement of hepatogenic cellular differentiation by 2 weeks and decrease in anti-fibrotic activity. Early differentiation of MSCs to progenitor oval cells and hepatocytes results in various therapeutic effects, including repair of damaged hepatocytes, intracellular glycogen restoration and resolution of fibrosis. Thus, these results support that the in vivo hepatogenic differentiation of MSCs is related to the beneficial effects of MSCs rather than the differentiated hepatocytes themselves.