Studies using Helicobacter-infected mice show that bone marrow-derived mesenchymal stem cells (MSCs) can repopulate the gastric epithelium and promote gastric cancer progression. Within the tumor microenvironment of the stomach, pro-inflammatory cytokine interferon-gamma (IFNgamma) and Sonic hedgehog (Shh) are elevated. IFNgamma is implicated in tumor proliferation via activation of the Shh signaling pathway in various tissues but whether a similar mechanism exists in the stomach is unknown. We tested the hypothesis that IFNgamma drives MSC proliferation and recruitment, a response mediated by Shh signaling. The current study uses transplantation of an in vitro transformed mesenchymal stem cell line (stMSC(vect)), that over-expresses hedgehog signaling, in comparison to non-transformed wild-type MSCs (wtMSCs), wtMSCs transfected to over-express Shh (wtMSC(Shh)), and stMSCs transduced with lentiviral constructs containing shRNA targeting the Shh gene (stMSC(ShhKO)). The effect of IFNgamma on MSC proliferation was assessed by cell cycle analysis in vitro using cells treated with recombinant IFNgamma (rmIFNgamma) alone, or in combination with anti-Shh 5E1 antibody, and in vivo using mice transplanted with MSCs treated with PBS or rmIFNgamma. In vitro, IFNgamma significantly increased MSC proliferation, a response mediated by Shh that was blocked by 5E1 antibody. The MSC population collected from bone marrow of PBS- or IFNgamma-treated mice showed that IFNgamma significantly increased the percentage of all MSC cell lines in S phase, with the exception of the stMSCs(ShhKO) cells. While the MSC cell lines with intact Shh expression were recruited to the gastric mucosa in response to IFNgamma, stMSCs(ShhKO) were not. Hedgehog signaling is required for MSC proliferation and recruitment to the stomach in response to IFNgamma.