Mesenchymal stem cells (MSCs) are being tested in a wide range of human diseases; however, loss of potency and inconsistent quality severely limit their use. To overcome these issues, we have utilized a developmental precursor called the hemangioblast as an intermediate cell type in the derivation of a highly potent and replenishable population of MSCs from human embryonic stem cells (hESCs). This method circumvents the need for labor-intensive hand-picking, scraping, and sorting that other hESC-MSC derivation methods require. Moreover, unlike previous reports on hESC-MSCs, we have systematically evaluated their immunomodulatory properties and in vivo potency. As expected, they dynamically secrete a range of bioactive factors, display enzymatic activity, and suppress T-cell proliferation that is induced by either allogeneic cells or mitogenic stimuli. However, they also display unique immunophenotypic properties, as well as a smaller size and >30,000-fold proliferative capacity than bone marrow-derived MSCs. In addition, this is the first report which demonstrates that hESC-MSCs can inhibit CD83 up-regulation and IL-12p70 secretion from dendritic cells and enhance regulatory T-cell populations induced by interleukin 2 (IL-2). This is also the first report which shows that hESC-MSCs have therapeutic efficacy in two different autoimmune disorder models, including a marked increase in survival of lupus-prone mice and a reduction of symptoms in an autoimmune model of uveitis. Our data suggest that this novel and therapeutically active population of MSCs could overcome many of the obstacles that plague the use of MSCs in regenerative medicine and serve as a scalable alternative to current MSC sources.