Rationale: Acute Respiratory Distress Syndrome (ARDS) remains a major cause of respiratory failure in critically ill patients. Mesenchymal Stromal Cells (MSCs) are a promising candidate for a cell based therapy. However, the mechanisms of MSCs effects in ARDS are not well understood. Here we focused on the paracrine effect of MSCs on macrophage polarization and the role of extracellular vesicle (EV)–mediated mitochondrial transfer. Objectives: To determine the effects of human MSCs on macrophage function in the ARDS environment and to elucidate the mechanisms of these effects. Methods: Human monocyte-derived macrophages (MDMs) were studied in non-contact co-culture with human MSCs when stimulated with lipopolysaccharide (LPS) or bronchoalveolar lavage fluid (BALF) from ARDS patients. Murine alveolar macrophages (AMs) were cultured ex vivo with/without human MSC-EVs before adoptive transfer to LPS-injured mice. Measurements and Main Results: MSCs suppressed cytokine production, increased M2 macrophage marker expression and augmented phagocytic capacity of human MDMs stimulated with LPS or ARDS BALF. These effects were partially mediated by CD44-expressing EVs. Adoptive transfer of AMs pre-treated with MSC-EVs reduced inflammation and lung injury in LPS-injured mice. Inhibition of oxidative phosphorylation in MDMs prevented the modulatory effects of MSCs. Generating dysfunctional mitochondria in MSCs using rhodamine-6G pre-treatment also abrogated these effects. Conclusions: In the ARDS environment, MSCs promote an anti-inflammatory and highly phagocytic macrophage phenotype through EV-mediated mitochondrial transfer. MSC-induced changes in macrophage phenotype critically depend on enhancement of macrophage oxidative phosphorylation. AMs treated with MSC-derived EVs ameliorate lung injury in vivo.