To investigate the effect of human umbilical cord stem cells, both mesenchymal and hematopoietic (CD34+), in the treatment of arthritis. Mesenchymal stem cells (MSCs) and hematopoietic (CD34+) stem cells (HSC) were isolated from human umbilical cord blood obtained from the umbilical cord of healthy pregnant donors undergoing full-term normal vaginal delivery. MSC, HSC, methotrexate (MTX) and sterile saline were injected intra-articularly into the rat hindpaw with complete freunds adjuvant (CFA) induced arthritis after the onset of disease (day 34), when arthritis had become well established (arthritis score ≥ 2). Arthritic indices were evaluated and the levels of interleukin (IL)-1, tumor necrosis factor (TNF)-α and interferon (IFN)-γ and anti-inflammatory cytokine IL-10 in serum were determined using enzyme-linked immunosorbent assay. Animals of all groups were sacrificed 34 d after beginning treatment, except positive control (PC) which was sacrificed at 10, 21 and 34 d for microscopic observation of disease progression. We used hematoxylin, eosin and Masson's trichrome stains for histopathological examination of cartilage and synovium. The mean arthritis scores were similar in all groups at 12 and 34 d post immunization, with no statistical significant difference. Upon the injection of stem cells (hematopoietic and mesenchymal), the overall arthritis signs were significantly improved around 21 d after receiving the injection and totally disappeared at day 34 post treatment in MSC group. Mean hindpaw diameter (mm) in the MSC rats was about half that of the PC and MTX groups (P = 0.007 and P = 0.021, respectively) and 0.6 mm less than the HSC group (P = 0.047), as indicated by paw swelling. Associated with these findings, serum levels of TNF-α, IFN-γ and IL-1 decreased significantly in HSC and MSC groups compared to PC and MTX groups (P < 0.05), while the expression of IL-10 was increased. Histopathological examination with H and E stain revealed that the MTX treated group showed significant reduction of leucocytic infiltrate and hypertrophy of the synovial tissue with moderate obliteration of the joint cavity. Stem cells treated groups (both hematopoietic CD34+ and mesenchymal), showed significant reduction in leucocytic infiltrate and hypertrophy of the synovial tissue with mild obliteration of the joint cavity. With Masson's trichrome, stain sections from the PC group showed evidence of vascular edema of almost all vessels within the synovium in nearly all arthritic rats. Vacuoles were also visible in the outer vessel wall. The vessel became hemorrhagic and finally necrotic. In addition, there was extensive fibrosis completely obliterating the joint cavity. The mean color area percentage of collagen in this group was 0.324 ± 0.096, which was significantly increased when compared to the negative control group. The mean color area percentage of collagen in hematopoietic CD34+ and mesenchymal groups was 0.176 ± 0.0137 and 0.174 ± 0.0197 respectively, which showed a marked decrement compared to the PC group, denoting a mild increase in synovial tissue collagen fibers. MSC enhance the efficacy of CFA-induced arthritis treatment, most likely through the modulation of the expression of cytokines and amelioration of pathological changes in joints.