This study aims to investigate the effectiveness of umbilical cord mesenchymal stem cells (UCMSCs) in treating osteoarthritis (OA). Sprague-Dawley rats were used in in vivo experiments and divided into four groups: normal, OA model, saline, and UCMSC-treated groups (n = 6). An OA model was established by injecting iodoacetic acid into the joint cavity. The results indicate that UCMSC transplantation significantly reduced joint surface and articular cartilage damage, and the levels of IL-1β, TNF-α, and MMP13 in the joint fluid were significantly reduced after UCMSC treatment. In vitro experiments showed that co-culturing UCMSCs and chondrocytes promoted the expression of aggrecan, COL2, SOX9, and BCL-2; downregulated the expression of BAX and BAD in chondrocytes; and promoted the expression of IL-10 and TGF-β1 in UCMSCs. Additionally, the supernatant of UCMSCs inhibited the expression of IL-1β and TNF-α in the articular cavity and promoted the expression of COL2 and aggrecan in vivo. These effects were impaired when IL-10 and TGF-β1 were removed. Collectively, UCMSC transplantation appears to improve joint pathology, reduce inflammatory factors, and decrease chondrocyte apoptosis, likely through the involvement of IL-10 and TGF-β1, thus providing a potential therapeutic option for patients with OA.