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Mesenchymal stem or stromal cells (MSC) are under investigation as a potential immunotherapy. MSC are usually administered via intravenous infusion, after which they are trapped in the lungs and die and disappear within a day. The fate of MSC after their disappearance from the lungs is unknown and it is unclear how MSC realize their immunomodulatory effects in their short lifespan. We examined immunological mechanisms determining the fate of infused MSC and the immunomodulatory response associated with it. Tracking viable and dead human umbilical cord MSC (ucMSC) in mice using Qtracker beads (contained in viable cells) and Hoechst33342 (staining all cells) revealed that viable ucMSC were present in the lungs immediately after infusion. Twenty‐four hours later, the majority of ucMSC were dead and found in the lungs and liver where they were contained in monocytic cells of predominantly non‐classical Ly6C low  phenotype. Monocytes containing ucMSC were also detected systemically. In vitro experiments confirmed that human CD14 ++ /CD16 ‐  classical monocytes polarized toward a non‐classical CD14 ++ CD16 + CD206 +  phenotype after phagocytosis of ucMSC and expressed programmed death ligand‐1 and IL‐10, while TNF‐α was reduced. ucMSC‐primed monocytes induced Foxp3 +  regulatory T cell formation in mixed lymphocyte reactions. These results demonstrate that infused MSC are rapidly phagocytosed by monocytes, which subsequently migrate from the lungs to other body sites. Phagocytosis of ucMSC induces phenotypical and functional changes in monocytes, which subsequently modulate cells of the adaptive immune system. It can be concluded that monocytes play a crucial role in mediating, distributing, and transferring the immunomodulatory effect of MSC. S tem  C ells   2018;36:602–615

Immunomodulation By Therapeutic Mesenchymal Stromal Cells (MSC) Is Triggered Through Phagocytosis of MSC By Monocytic Cells