Bone marrow mesenchymal stem cells (MSCs) comprise a heterogeneous population of postnatal progenitor cells with profound immunomodulatory properties, such as upregulation of Foxp3(+) regulatory T cells (Tregs) and downregulation of Th17 cells. However, it is unknown whether different MSC subpopulations possess the same range of immunomodulatory function. Here, we show that a subset of single colony-derived MSCs producing IL-17 is different from bulk MSC population in that it cannot upregulate Tregs, downregulate Th17 cells, or ameliorate disease phenotypes in a colitis mouse model. Mechanistically, we reveal that IL-17, produced by these MSCs, activates the NFκB pathway to downregulate TGF-β production in MSCs, resulting in abolishment of MSC-based immunomodulation. Furthermore, we show that NFκB is able to directly bind to TGF-β promoter region to regulate TGF-β expression in MSCs. Moreover, these IL-17(+) MSCs possess anti-Candida albicans growth effects in vitro and therapeutic effect in C. albicans-infected mice. In summary, this study shows that MSCs contain an IL-17(+) subset capable of inhibiting C. albicans growth, but attenuating MSC-based immunosuppression via NFκB-mediated downregulation of TGF-β.