Mesenchymal stem cells (MSCs) can exhibit either prooncogenic or antitumor properties depending on the context. Based on our previous study, we hypothesized that MSCs engineered to deliver IFN-γ would kill cancer cells through persistent activation of the TRAIL pathway. Human bone-marrow (BM-) derived MSCs were isolated, amplified, and transduced with a lentiviral vector encoding the IFN-γ gene under the control of the EF1α promoter. The IFN-γ-modified MSCs effectively secreted functional IFN-γ, which led to long-term expression of TRAIL. More importantly, the IFN-γ-modified MSCs selectively induced apoptosis in lung tumor cells through caspase-3 activation within the target cells. The percentage of activated-caspase-3-positive tumor cells in IFN-γ-modified MSCs cocultures was significantly higher than in control MSCs cocultures. Treatment with anti-TRAIL antibody dramatically suppressed the caspase-3 activation observed in H460 cells. After injection into nude mice, the IFN-γ-modified MSCs inhibited the growth and progression of lung carcinoma compared with control cells. Collectively, our results provide a new strategy for tumor therapy that utilizes IFN-γ-modified MSCs.