Mesenchymal stem cells (MSCs) are a group of stem cells derived from the mesodermal mesenchyme. MSCs can be obtained from a variety of tissues, including bone marrow, umbilical cord tissue, umbilical cord blood, peripheral blood and adipose tissue. Under certain conditions, MSCs can differentiate into many cell types both in vitro and in vivo, including hepatocytes. To date, four main strategies have been developed to induce the transdifferentiation of MSCs into hepatocytes: addition of chemical compounds and cytokines, genetic modification, adjustment of the micro‐environment and alteration of the physical parameters used for culturing MSCs. Although the phenomenon of transdifferentiation of MSCs into hepatocytes has been described, the detailed mechanism is far from clear. Generally, the mechanism is a cascade reaction whereby stimulating factors activate cellular signalling pathways, which in turn promote the production of transcription factors, leading to hepatic gene expression. Because MSCs can give rise to hepatocytes, they are promising to be used as a new treatment for liver dysfunction or as a bridge to liver transplantation. Numerous studies have confirmed the therapeutic effects of MSCs on hepatic fibrosis, cirrhosis and other liver diseases, which may be related to the differentiation of MSCs into functional hepatocytes. In addition to transdifferentiation into hepatocytes, when MSCs are used to treat liver disease, they may also inhibit hepatocellular apoptosis and secrete various bioactive molecules to promote liver regeneration. In this review, the capacity and molecular mechanism of MSC transdifferentiation, and the therapeutic effects of MSCs on liver diseases are thoroughly discussed.