Rheumatoid arthritis (RA) is an autoimmune disease characterized by chronic inflammatory synovitis leading to joint destruction and systemic bone loss. The inflammation-induced bone loss is mediated by increased osteoclast formation and function. Current antirheumatic therapies primarily target suppression of inflammatory cascade with limited or no success in controlling progression of bone destruction. Mesenchymal stem cells (MSCs) by virtue of their tissue repair and immunomodulatory properties have shown promising results in various autoimmune and degenerative diseases. However, the role of MSCs in prevention of bone destruction in RA is not yet understood. In this study, we investigated the effect of adipose-derived MSCs (ASCs) on in vitro formation of bone-resorbing osteoclasts and pathological bone loss in the mouse collagen-induced arthritis (CIA) model of RA. We observed that ASCs significantly inhibited receptor activator of NF-κB ligand (RANKL)–induced osteoclastogenesis in both a contact-dependent and -independent manner. Additionally, ASCs inhibited RANKL-induced osteoclastogenesis in the presence of proinflammatory cytokines such as TNF-α, IL-17, and IL-1β. Furthermore, treatment with ASCs at the onset of CIA significantly reduced clinical symptoms and joint pathology. Interestingly, ASCs protected periarticular and systemic bone loss in CIA mice by maintaining trabecular bone structure. We further observed that treatment with ASCs reduced osteoclast precursors in bone marrow, resulting in decreased osteoclastogenesis. Moreover, ASCs suppressed autoimmune T cell responses and increased the percentages of peripheral regulatory T and B cells. Thus, we provide strong evidence that ASCs ameliorate inflammation-induced systemic bone loss in CIA mice by reducing osteoclast precursors and promoting immune tolerance.