Acute graft-versus-host disease (aGVHD) is a life-threatening complication following allogeneic haematopoietic stem cell transplantation (HSCT), occurring in up to 30–50% of patients who receive human leucocyte antigen (HLA)-matched sibling transplants. Current therapies for steroid refractory aGVHD are limited, with the prognosis of patients suboptimal. Mesenchymal stem or stromal cells (MSC), a heterogeneous cell population present in many tissues, display potent immunomodulatory abilities. Autologous and allogeneic ex-vivo expanded human MSC have been utilized to treat aGVHD with promising results, but the mechanisms of therapeutic action remain unclear. Here a robust humanized mouse model of aGVHD based on delivery of human peripheral blood mononuclear cells (PBMC) to non-obese diabetic (NOD)-severe combined immunodeficient (SCID) interleukin (IL)-2rγnull (NSG) mice was developed that allowed the exploration of the role of MSC in cell therapy. MSC therapy resulted in the reduction of liver and gut pathology and significantly increased survival. Protection was dependent upon the timing of MSC therapy, with conventional MSC proving effective only after delayed administration. In contrast, interferon (IFN)-γ-stimulated MSC were effective when delivered with PBMC. The beneficial effect of MSC therapy in this model was not due to the inhibition of donor PBMC chimerism, as CD45+ and T cells engrafted successfully in this model. MSC therapy did not induce donor T cell anergy, FoxP3+ T regulatory cells or cause PBMC apoptosis in this model; however, it was associated with the direct inhibition of donor CD4+ T cell proliferation and reduction of human tumour necrosis factor-α in serum.