Osteoarthritis (OA), one of the most common joint disease, affects more than 80% of the population aged 70 or over. Mesenchymal stem cells (MSCs) show multi-potent differentiation and self-renewal capability, and, after exposure to an inflammatory environment, also exhibit immunosuppressive properties. In this study, we have used a model of lipopolysaccharide (LPS)-stimulated chondrocytes to evaluate MSC anti-inflammatory efficacy. The anti-inflammatory mechanism was tested in two cell-contained culture systems: (i) MSC-chondrocyte indirect contact system and (ii) MSC-chondrocyte direct contact system, and one cytokine-only culture system: MSC-conditioned medium (CM) system. Results showed that MSCs reduced chondrocyte inflammation through both paracrine secretion and cell-to-cell contact. The inflammation-associated, and free-radical-related genes were down-regulated significantly in the direct contact system on 24 h, however, the TNF-α. IL-6 were upregulated and aggrecan, COLII were downregulated on 72 h in direct contact system. Moreover, we found CM produced by MSC possess well therapeutic effect on inflammatory chondorcyte, and the 10-fold concentrated MSC-conditioned medium could down-regulated chondorcyte synthesis inflammation-associated, and free-radical-related genes, such as TNF-α, IL-1β, IL-6 and iNOS even treated for 72 h. In conclusion, MSC-CM showed great potential for MSC-based therapy for OA.