Respiratory syncytial virus (RSV) has been reported to infect human mesenchymal stem cells (MSCs) but the consequences are poorly understood. MSCs are present in nearly every organ including the nasal mucosa and the lung and play a role in regulating immune responses and mediating tissue repair. We sought to determine whether RSV infection of MSCs enhances their immune regulatory functions and contributes to RSV-associated lung disease. RSV was shown to replicate in human MSCs by fluorescence microscopy, plaque assay, and expression of RSV transcripts. RSV-infected MSCs showed differentially altered expression of cytokines and chemokines such as IL-1β, IL6, IL-8 and SDF-1 compared to epithelial cells. Notably, RSV-infected MSCs exhibited significantly increased expression of IFN-β (~100-fold) and indoleamine-2,3-dioxygenase (IDO) (~70-fold) than in mock-infected MSCs. IDO was identified in cytosolic protein of infected cells by Western blots and enzymatic activity was detected by tryptophan catabolism assay. Treatment of PBMCs with culture supernatants from RSV-infected MSCs reduced their proliferation in a dose dependent manner. This effect on PBMC activation was reversed by treatment of MSCs with the IDO inhibitors 1-methyltryptophan and vitamin K3 during RSV infection, a result we confirmed by CRISPR/Cas9-mediated knockout of IDO in MSCs. Neutralizing IFN-β prevented IDO expression and activity. Treatment of MSCs with an endosomal TLR inhibitor, as well as a specific inhibitor of the TLR3/dsRNA complex, prevented IFN-β and IDO expression. Together, these results suggest that RSV infection of MSCs alters their immune regulatory function by upregulating IFN-β and IDO, affecting immune cell proliferation, which may account for the lack of protective RSV immunity and for chronicity of RSV-associated lung diseases such as asthma and COPD.