Mesenchymal stem cell transplantation (MSCT) has been used to treat human diseases, but the detailed mechanisms underlying its success are not fully understood. Here we show that MSCT rescues bone marrow MSC (BMMSC) function and ameliorates osteopenia in Fas-deficient-MRL/lpr mice. Mechanistically, we show that Fas deficiency causes failure of miR-29b release, thereby elevating intracellular miR-29b levels, and downregulates DNA methyltransferase 1 (Dnmt1) expression in MRL/lpr BMMSCs. This results in hypomethylation of the Notch1 promoter and activation of Notch signaling, in turn leading to impaired osteogenic differentiation. Furthermore, we show that exosomes, secreted due to MSCT, transfer Fas to recipient MRL/lpr BMMSCs to reduce intracellular levels of miR-29b, which results in recovery of Dnmt1-mediated Notch1 promoter hypomethylation and thereby improves MRL/lpr BMMSC function. Collectively our findings unravel the means by which MSCT rescues MRL/lpr BMMSC function through reuse of donor exosome-provided Fas to regulate the miR-29b/Dnmt1/Notch epigenetic cascade.