Expression of indoleamine 2,3-dioxygenase (IDO) in mesenchymal stem cells (MSC) is thought to contribute to MSC-mediated immunosuppression. A lentiviral-based transgenic system was used to generate bone marrow stem cells (BMSC) which stably expressed IDO (IDO-BMSCs). Coculture of IDO-BMSCs with dendritic cells (DC) or T cells was used to evaluate the immunomodulatory effect of IDO-BMSCs. A heterotopic heart transplant model in rats was used to evaluate allograft rejection after IDO-BMSC treatment. Mechanisms of IDO-BMSC-mediated immunosuppression were investigated by evaluating levels of proinflammatory and anti-inflammatory cytokines, and production of Tregs. A significant decrease in DC marker-positive cells and a significant increase in Tregs were observed in IDO-BMSC cocultured. Treatment of transplanted rats with IDO-BMSCs was associated with significantly prolonged graft survival. Compared with the control groups, transplanted animals treated with IDO-BMSCs had a (1) significantly higher ejection fraction and fractional shortening, (2) significantly lower expression of CD86, CD80, and MHCII, and significantly higher expression in CD274, and Tregs, and (3) significantly higher levels of interleukin-10 (IL-10), transforming growth factor beta-1 (TGF-beta 1), TGF-beta 2, and TGF-beta 3, and significantly lower levels of IL-2 and interferon gamma. Our results expand our understanding of the molecular mechanisms underlying suppression of heart allograft rejection via IDO-expressing BMSCs.