Diabetic kidney disease (DKD) is a severe complication of diabetes, causing progressive kidney dysfunction, proteinuria, and fibrosis. Mesenchymal stem cells (MSCs) offer a promising treatment approach through their paracrine effects. This review explores the mechanisms of MSCs in treating DKD, including inhibiting inflammation, fibrosis, and oxidative stress, as well as modulating vascular endothelial growth factor (VEGF). Strategies to enhance MSC efficacy, such as preconditioning and genetic engineering, are discussed. The review also provides an overview of completed clinical trials assessing the effectiveness and safety of MSC transplantation in DKD patients. MSCs have the potential to directly intervene in the key mechanisms of DKD, offering an innovative treatment option. The review aims to guide future research and optimize therapeutic applications, ultimately improving the quality of life for DKD patients.