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We sought to determine whether an intact bone marrow is essential to lung repair following bleomycin-induced lung injury in mice, and the mechanisms of any protective effects conferred by bone marrow–derived mesenchymal stem cell (BMDMSC) transfer. We found that myelosupression increased susceptibility to bleomycin injury and that BMDMSC transfer was protective. Protection was associated with the differentiation of engrafted BMDMSC into specific and distinct lung cell phenotypes, with an increase in circulating levels of G-CSF and GM-CSF (known for their ability to promote the mobilization of endogenous stem cells) and with a decrease in inflammatory cytokines. In vitro, cells from injured, but not from normal, mouse lung produced soluble factors that caused BMDMSC to proliferate and migrate toward the injured lung. We conclude that bone marrow stem cells are important in the repair of bleomycin-injured lung and that transfer of mesenchymal stem cells protects against the injury. BMDMSC localize to the injured lung and assume lung cell phenotypes, but protection from injury and fibrosis also involves suppression of inflammation and triggering production of reparative growth factors.