Mesenchymal stem cells (MSCs) therapy has brought a great enthusiasm to the treatment of various immune disorders, tissue regeneration and transplantation therapy. MSCs are being extensively investigated for their immunomodulatory actions. MSCs can deliver immunomodulatory signals to inhibit allogeneic T cell immune responses by downregulating pro-inflammatory cytokines and increasing regulatory cytokines and growth factors. Islet transplantation is a therapeutic alternative to the insulin therapy for the treatment of type 1 diabetes mellitus (T1DM). However, the acute loss of islets due to the lack of vasculature and hypoxic milieu in the immediate post-transplantation period may lead to treatment failure. Moreover, despite the use of potent immunosuppressive drugs, graft failure persists because of immunological rejection. Many in vitro and in vivo researches have demonstrated the multipotency of MSCs as a mediator of immunomodulation and a great approach for enhancement of islet engraftment. MSCs can interact with immune cells of the innate and adaptive immune systems via direct cell–cell contact or through secretomes containing numerous soluble growth and immunomodulatory factors or mitochondrial transfer. This review highlights the interactions between MSCs and different immune cells to mediate immunomodulatory functions along with the importance of MSCs therapy for the successful islet transplantation.