Mesenchymal stem cells (MSCs) are believed to exert their regenerative effects through differentiation and modulation of inflammatory responses. However, the relationship between the severity of inflammation and stem cell-mediated tissue repair has not been formally investigated. In this study, we applied different concentrations of dexamethasone (Dex) to anti-CD3-activated splenocyte cultured with or without MSCs. As expected, Dex exhibited a classical dose-dependent inhibition of T-cell proliferation. Surprisingly, although MSCs also blocked T-cell proliferation, the presence of Dex unexpectedly showed a dose-dependent reversion of T-cell proliferation. This effect of Dex was found to be exerted through interfering STAT1 phosphorylation-prompted expression of inducible nitric oxide synthase (iNOS). Interestingly, inflammation-induced chemokines in MSCs was unaffected. To test the role of inflammation severity in stem cell-mediated tissue repair, we employed mice with carbon tetrachloride-induced advanced liver fibrosis and found that although MSCs alone were effective, concurrent administration of Dex abrogated the therapeutic effects of MSCs on fibrin deposition, serum levels of bilirubin, albumin, and aminotransferases, as well as T-lymphocyte infiltration, especially IFN-γ(+)CD4(+) and IL-17A(+)CD4(+)T cells. Likewise, iNOS(-/-) MSCs, which produce chemokines but not nitric oxide under inflammatory conditions, are ineffective in treating advanced liver fibrosis. Therefore, inflammation has a critical role in MSC-mediated tissue repair. In addition, concomitant application of MSCs with steroids should be avoided.