Background: Heparanase, endoglycosidase that cleaves heparan sulfate side chains of heparan sulfate proteoglycans, plays important roles in cancer metastasis, angiogenesis and inflammation. Design and Methods: Applying a mouse model of bone marrow transplantation and transgenic mice over-expressing heparanase, we evaluated the effect of heparanase on the engraftment process and the development of graft-versus-host disease. Results: Analysis of F1 mice undergoing allogeneic bone marrow transplantation from C57BL/6 mice demonstrated a better and faster engraftment in mice receiving cells from donors that were pretreated with heparanase. Moreover, heparanase treated recipient F1 mice showed only a mild appearance of graft-versus-host disease and died 27 days post transplantation while control mice rapidly developed signs of graft-versus-host disease (i.e., weight loss, hair loss, diarrhea) and died after 12 days, indicating a protective effect of heparanase against graft-versus-host disease. Similarly, we applied transgenic mice over-expressing heparanase in most tissues as the recipients of BMT from C57BL/6 mice. Monitoring clinical parameters of graft-versus-host disease, the transgenic mice showed 100% survival on day 40 post transplantation, compared to only 50% survival on day 14, in the control group. In vitro and in vivo studies revealed that heparanase inhibited T cell function and activation through modulation of their cytokine repertoire, indicated by a marked increase in the levels of Interleukin-4, Interleukin-6 and Interleukin-10, and a parallel decrease in Interleukin-12, tumor necrosis factor-alfa and interferon-gamma. Using point mutated inactive enzyme, we found that the shift in cytokine profile was independent of heparanase enzymatic activity. Conclusions: Our results indicate a significant role of heparanase in bone marrow transplantation biology, facilitating engraftment and suppressing graft-versus-host disease, apparently through an effect on T cell activation and cytokine production pattern.