Bone marrow-derived mesenchymal stem cells (BM-MSC) are currently being investigated in preclinical and clinical settings because of their self-renewal and multipotent differentiative capacity or their immunosuppressive function. However, BM may be detrimental because of the highly invasive donation procedure and BM-MSC decline with age. Therefore, MSC derived from other sources have been considered as an alternative. However, there is only limited knowledge on their immunomodulatory properties. Human umbilical cord blood (UCB) cells are good substitutes for BM-MSC because of the immaturity of newborn cells. In this study, we successfully isolated MSC from UCB. The morphological phenotypes, cell cycle status, surface markers and differentiation potential of these clonally expanded cells are consistent with BM-MSC. Furthermore, UCB-MSC expanded in vitro retain low immunogenicity and an immunomodulatory effect. Flow cytometry analysis showed that UCB-MSC did not express CD40, CD40 ligand, CD80, CD86 and major histocompatibility complex class II molecules. We have demonstrated that UCB-MSC are incapable of inducing allogeneic peripheral blood mononuclear cell (PBMC) proliferation and have a dose-dependent inhibition of PBMC immune responses in mixed lymphocyte reactions (MLR) and phytohaemagglutinin activation assays, even after interferon-gamma treatment. Additionally, we have found that UCB-MSC can suppress the function of mature dendritic cells. Using transwell systems, we have demonstrated an inhibition mechanism that depends on both cell contact and soluble factors. Based on the findings we conclude that banked UCB could serve as a potential alternative source of MSC for allogeneic application in the future.