Mesenchymal stem cells (MSCs), the nonhematopoietic progenitor cells found in various adult tissues, are characterized by their ease of isolation and their rapid growth in vitro while maintaining their differentiation potential, allowing for extensive culture expansion to obtain large quantities suitable for therapeutic use. These properties make MSCs an ideal candidate cell type as building blocks for tissue engineering efforts to regenerate replacement tissues and repair damaged structures as encountered in various arthritic conditions. Osteoarthritis (OA) is the most common arthritic condition and, like rheumatoid arthritis (RA), presents an inflammatory environment with immunological involvement and this has been an enduring obstacle that can potentially limit the use of cartilage tissue engineering. Recent advances in our understanding of the functions of MSCs have shown that MSCs also possess potent immunosuppression and anti-inflammation effects. In addition, through secretion of various soluble factors, MSCs can influence the local tissue environment and exert protective effects with an end result of effectively stimulating regeneration in situ. This function of MSCs can be exploited for their therapeutic application in degenerative joint diseases such as RA and OA. This review surveys the advances made in the past decade which have led to our current understanding of stem cell biology as relevant to diseases of the joint. The potential involvement of MSCs in the pathophysiology of degenerative joint diseases will also be discussed. Specifically, we will explore the potential of MSC-based cell therapy of OA and RA by means of functional replacement of damaged cartilage via tissue engineering as well as their anti-inflammatory and immunosuppressive activities.