Accidental phosgene exposure could result in acute lung injury (ALI), effective therapy is needed for the patients with phosgene-induced ALI. As a type of cells with therapeutic potential, mesenchymal stem cells (MSCs) have been showed its efficacy in multiple diseases. Here, we assessed the therapeutic potential of MSCs in phosgene-induced ALI and explored the related mechanisms. After isolation and characterization of rat bone marrow MSCs (BMMSCs), we transplanted BMMSCs into the rats exposed to phosgene and observed significant improvement on the lung wet-to-dry ratio and partial oxygen pressure (PaO2) at 6, 24, 48 h after phosgene exposure. Histological analyses revealed reduced sign of pathological changes in the lungs. Reduced level of pro-inflammatory tumor necrosis factor α and increased level of anti-inflammatory factor interleukin-10 were found in both bronchoalveolar lavage and plasma. Significant increased expression of epithelial cell marker AQP5 and SP-C was also found in the lung tissue. In conclusion, treatment with MSC markedly decreases the severity of phosgene-induced ALI in rats, and these protection effects were closely related to the pulmonary air blood barrier repairment and inflammatory reaction regulation.