Abstract Background The potential of mesenchymal stem cells (MSCs) for immunosuppression has been tested in transplantation, but its mechanisms are not fully understood. This study investigated the role of MSC-expressing B7-H1 in the induction of immune tolerance to cardiac allografts by the combination therapy of MSCs and rapamycin (RAPA). Methods The anti-alloimmunity of donor MSCs in the presence or absence of RAPA was examined in both mouse cardiac allograft model (C57BL/6 to BALB/c mice) and a variety of cultured immune cells. Immunohistochemical staining was used for the measurement of intragraft antibody deposition, and fluorescence-activated cell sorting (FACS) for the determination of serum alloantibodies and leukocyte phenotypes. Results B7-H1 expression in cultured MSCs was up-regulated following IFN-γ stimulation. In transplant recipients, combination therapy of MSCs and RAPA induced immune tolerance to allografts, but blockade of B7-H1 on MSCs with monoclonal antibody abrogated the combination therapy-induced immune tolerance as heart allografts were rejected. The negative effect of MSC-expressing B7-H1 neutralization on graft survival was correlated with a reduction of regulatory immune cells (CD4+CD25+Foxp3+ T cells, tolerogenic dendritic cells and IL-4highIL-10HighCD83low B cells), and also with an increase in alloantibody (IgG and IgM) levels both inside the grafts and in the circulation as compared with un-neutralized controls. In vitro MSC-mediated suppression of antibody production and B cell proliferation depended on B7-H1 function and cell contact between CD19+ B cells and MSCs. Conclusion These data suggest that MSC-expressing B7-H1 mediates the immune tolerance to cardiac allografts in recipients receiving MSC and RAPA combination therapy.