AbstractMany reports have previously utilized a human bone morphogenetic protein 2 (BMP2)‐expressing recombinant adenoviral vector (AdBMP2) and mesenchymal stem cells (MSCs) for osteoinductive gene therapy. However, immunosuppression is essential for osteoinduction by AdBMP2, and this is one of the major impediments to its clinical use. In the present study, in vitro propagated MSCs were transduced using an adenoviral (Ad) vector to express the gene encoding cytotoxic T lymphocyte antigen 4‐immunoglobulin (CTLA4Ig). Lymphocyte response was induced by allogeneic‐irradiated MSCs as stimulators. We also examined the effects of cotransfection with a combination of the CTLA4Ig and the BMP2 gene on osteoblastic cell differentiation. The results showed that BMP2 gene transfected MSC elicited significant stimulatory responses, and one‐way MLR reactions were significantly blunted by CTLA4Ig. Further study demonstrates that cotransfection of MSCs with the combination of the CTLA4Ig and the BMP2 gene stimulates osteoblastic cell differentiation in vitro. The findings suggest that genetic engineering of MSCs to express an immunosuppressive molecule in combination with an osteogenic protein gene may have potential application in the treatment of several genetic diseases and in bone reconstruction. © 2007 Orthopaedic Research Society. Published by Wiley Periodicals, Inc. J Orthop Res 26:314–321, 2008