Bone marrow-derived mesenchymal stem cells (MSCs) are attractive candidates for use in regenerative medicine since they are easily accessible and can be readily expanded in vivo, and possess unique immunogenic properties. Moreover, these multipotent cells display intriguing environmental adaptability and secretory capacity. The ability of MSCs to migrate and engraft in a range of tissues has received significant attention. Evidence indicating that MSC transplantation results in functional improvement in animal models of neurological disorders has highlighted exciting potential for their use in neurological cell-based therapies. The manner in which MSCs elicit positive effects in the damaged nervous system remains unclear. Cell fusion and/or ‘transdifferentiation’ phenomena, by which MSCs have been proposed to adopt neural cell phenotypes, occur at very low frequency and are unlikely to fully account for observed neurological improvement. Alternatively, MSC-mediated neural recovery may result from the release of soluble molecules, with MSC-derived growth factors and extracellular matrix components influencing the activity of endogenous neural cells. This review discusses the potential of MSCs as candidates for use in therapies to treat neurological disorders and the molecular and cellular mechanisms by which they are understood to act.