Osteoarthritis is a degenerative joint disease generally characterized by progressive cartilage degeneration,. Stem cell therapy holds a great promise for the repair of injured tissues and organs, including OA. The present study aims to detect the effect of mesenchymal stem cells on osteoarthritis in rabbits and also to detect its possible mechaism of action.. The study was carried on 20 New Zealand White rabbits. They were divided into 6 groups as follow: control group, phosphate Buffer group injected intra articularly(IA) by phosphate buffer, stem cell group recieved stem cells, the arthritis group induced by LPS, LPS & Stem cell treatment group injected by LPS then treated after one week by stem cells (IA), LPS &stem cell prophylactic group, rabbits were injected prophylactically by stem cells then by LPS. The results of the present study showed significant increase CRP and TNF-α in OA group compared to control group however when this group is treated with MSCs there was significant decrease in these parameters. Also, there was a significant decrease in TGFβ and CTGF in OA group compared to control group and increased when treated with MSCs. Histopathological results shows improve of OA after stem cell therapy Conclusion, MSC can exert beneficial effect on OA possibly by a paracrine mechanism through regulation of inflammatory cytokines such as TNF-α and growth factors such as TGF-β and CTGF.