Embryonic stem cells or their progeny inevitably differ genetically from those who might receive the cells as transplants. We tested the barriers to engraftment of embryonic stem cells and the mechanisms that determine those barriers. Using formation of teratomas as a measure of engraftment, we found that semiallogeneic and fully allogeneic embryonic stem cells engraft successfully in mice, provided a sufficient number of cells are delivered. Successfully engrafted cells did not generate immunological memory; unsuccessfully engrafted cells did. Embryonic stem cells reversibly, and in a dose-dependent manner, inhibited T-cell proliferation to various stimuli and the maturation of antigen-presenting cells induced by lipopolysaccharide. Inhibition of both was owed at least in part to production of transforming growth factor-beta by the embryonic stem cells. Thus, murine embryonic stem cells exert "immunosuppression" locally, enabling engraftment across allogeneic barriers.