Mesenchymal stromal cells (MSC) are crucial components of the bone marrow (BM) microenvironment essential for regulating self-renewal, survival and differentiation of hematopoietic stem/progenitor cells (HSPC) in the stem cell niche. MSC are functionally and phenotypically altered in myelodysplastic syndromes (MDS), contributing to disease progression. MDS MSC do not harbor recurrent genetic alterations but have been shown to exhibit an altered methylome compared to MSC from healthy controls. We examined growth, differentiation and HSPC-supporting capacity of ex vivo expanded MSC from MDS patients in comparison to age-matched healthy controls after direct treatment in vitro with the hypomethylating agent azacitidine (AZA). We show that AZA exerts a direct effect on MSC by modulating their differentiation potential. Osteogenesis was significantly boosted in healthy MSC while adipogenesis was inhibited in both healthy and MDS MSC. In co-culture experiments, both AZA treated MDS MSC and healthy MSC exhibited enhanced support of non-clonal HSPC which was associated with increased cell cycle induction. Conversely, clonal MDS HSPC were inhibited by contact with AZA treated MSC. RNA-sequencing analyses of stromal cells revealed changes in pathways essential for HSPC support as well as in immune regulatory pathways. In sum, our data demonstrate that AZA treatment of stromal cells leads to upregulation of HSPC-supportive genes and cell cycle induction in co-cultured healthy HSPC, resulting in a proliferative advantage over clonal HSPC. Thus, restoration of functional hematopoiesis by AZA may be driven by activated stromal support factors in MSC providing cell cycle cues to healthy HSPC. Overall design: RNA sequencing was performed on a mesenchymal stromal cell line (EL08-1D2), either untreated or treated with Azacitidine [(-)AZA vs. (+)AZA].