Mesenchymal stem cells (MSCs) modulate immune responses and maintain self-tolerance. Their trophic activities and regenerative properties make them potential immunosuppressants for treating autoimmune and autoinflammatory diseases. MSCs are drawn to sites of injury and inflammation where they can both reduce inflammation and contribute to tissue regeneration. An increased understanding of the role of MSCs in the development and progression of autoimmune disorders has revealed that MSCs are passive targets in the inflammatory process, becoming impaired by it and exhibiting loss of immunomodulatory activity. MSCs have been considered as potential novel cell therapies for severe autoimmune and autoinflammatory diseases, which at present have only disease modifying rather than curative treatment options. MSCs are emerging as potential therapies for severe autoimmune and autoinflammatory diseases. Clinical application of MSCs in rare cases of severe disease in which other existing treatment modalities have failed, have demonstrated potential use in treating multiple diseases, including rheumatoid arthritis, systemic lupus erythematosus, myocardial infarction, liver cirrhosis, spinal cord injury, multiple sclerosis, and COVID-19 pneumonia. This review explores the biological mechanisms behind the role of MSCs in autoimmune and autoinflammatory diseases. It also covers their immunomodulatory capabilities, potential therapeutic applications, and the challenges and risks associated with MSC therapy.