Mesenchymal stem cells (MSC) derived from bone marrow can potentially reduce the acute inflammatory response in spinal cord injury (SCI) and thus promote functional recovery. However, the precise mechanisms through which transplanted MSC attenuate inflammation after SCI are still unclear. The present study was designed to investigate the effects of MSC transplantation with a special focus on their effect on macrophage activation after SCI. Rats were subjected to T9–T10 SCI by contusion, then treated 3 days later with transplantation of 1.0×106 PKH26-labeled MSC into the contusion epicenter. The transplanted MSC migrated within the injured spinal cord without differentiating into glial or neuronal elements. MSC transplantation was associated with marked changes in the SCI environment, with significant increases in IL-4 and IL-13 levels, and reductions in TNF-α and IL-6 levels. This was associated simultaneously with increased numbers of alternatively activated macrophages (M2 phenotype: arginase-1- or CD206-positive), and decreased numbers of classically activated macrophages (M1 phenotype: iNOS- or CD16/32-positive). These changes were associated with functional locomotion recovery in the MSC-transplanted group, which correlated with preserved axons, less scar tissue formation, and increased myelin sparing. Our results suggested that acute transplantation of MSC after SCI modified the inflammatory environment by shifting the macrophage phenotype from M1 to M2, and that this may reduce the effects of the inhibitory scar tissue in the subacute/chronic phase after injury to provide a permissive environment for axonal extension and functional recovery.