<jats:p>Mesenchymal stem cells (MSCs) accumulate specifically in both primary tumors and metastases following systemic administration. However, the poor payload capacity of MSCs limits their use in small molecule drug delivery. To improve drug payload in MSCs, we explored polymeric nanoparticles that were functionalized with transactivator of transcription (TAT) peptide. Paclitaxel loaded poly(DL-lactide-co-glycolide) (PLGA) nanoparticles (15–16% w/w paclitaxel; diameter of 225 ± 7 nm; and zeta potential of −15 ± 4 mV) were fabricated by emulsion-solvent evaporation method, followed by TAT-conjugation to the surface of nanoparticles via maleimide-thiol chemistry. Our studies demonstrated that TAT functionalization improved the intracellular accumulation and retention of nanoparticles in MSCs. Further, nano-engineering of MSCs did not alter the migration and differentiation potential of MSCs. Treatment with nano-engineered MSCs resulted in significant (p < 0.05) inhibition of tumor growth and improved survival (p < 0.0001) in a mouse orthotopic model of lung cancer compared to that with free or nanoparticle encapsulated drug. In summary, our results demonstrated that MSCs engineered using TAT functionalized nanoparticles serve as an efficient carrier for tumor specific delivery of anticancer drugs, resulting in greatly improved therapeutic efficacy.</jats:p>