The presence of abnormal hematologic findings such as lymphopenia, thrombocytopenia, and pancytopenia were diagnosed in severe cases of avian influenza A H5N1. Whether direct viral dissemination to bone marrow (BM) cells causes this phenomenon remains elusive. We explore the susceptibility of the two stem cell types; hematopoietic stem cells (HSCs) and mesenchymal stromal cells (MSCs) isolated from human BM cells or cord blood, to infection with avian H5N1 viruses. For the first time, we demonstrated that the H5N1 virus could productively infect and induce cell death in both human stem cell types. In contrast, these activities were not observed upon human influenza virus infection. We also determined whether infection affects the immunomodulatory function of MSCs. We noted a consequent dysregulation of MSC-mediated immune modulation as observed by high cytokine and chemokine production in H5N1 infected MSCs and monocytes cocultures. These findings provide a better understanding of H5N1 pathogenesis in terms of broad tissue tropism and systemic spread.