Diabetic retinopathy (DR) is recognized as the most prevalent retinal degenerative disorder. Inflammatory response usually precedes microvascular alteration and is the primary factor of diabetic retinopathy. Activated microglia express many pro-inflammatory cytokines that exacerbate retina inflammation and disruption. In the present study, we found that MSCs alleviated blood-retina barrier (BRB) breakdown in diabetic rats, as evidenced by reduced retinal edema, decreased vascular leakage, and increased occludin expression. The MSC-treated retinal microglia exhibited reduced expression of M1-phenotype markers in the diabetic rats, including inducible nitric oxide synthase (iNOS), CD16, and pro-inflammatory cytokines. On the other hand, MSCs increased the expression of M2-phenotype markers, such as arginase-1 (Arg-1), CD206, and anti-inflammatory cytokines. HMGB1/TLR4 signaling pathway is activated in DR and inhibited after MSC treatment. Consistent with in vivo evidence, MSCs drove BV2 microglia toward M2 phenotype in vitro. Overexpression of HMGB1 in microglia reversed the effects of MSC treatment, suggesting HMGB1/TLR4 pathway is necessary for MSCs' regulatory effects on microglia polarization. Collectively, MSCs exert beneficial effects on DR by polarizing microglia from M1 toward M2 phenotype via inhibiting the HMGB1/TLR4 signaling pathway.