The mechanism of tumor-selective replication of oncolytic measles virus (MV) is poorly understood. Using a stepwise model of cellular transformation, in which oncogenic hits were additively expressed in human bone marrow-derived mesenchymal stromal cells, we show that MV-induced oncolysis increased progressively with transformation. The type 1 interferon (IFN) response to MV infection was significantly reduced and delayed, in accordance with the level of transformation. Consistently, we observed delayed and reduced signal transducer and activator of transcription (STAT1) phosphorylation in the fully transformed cells. Pre-treatment with IFNb restored resistance to MV-mediated oncolysis. Gene expression profiling to identify the genetic correlates of susceptibility to MV oncolysis revealed a dampened basal level of immune-related genes in the fully transformed cells compared to their normal counterparts. IFN-induced trans-membrane protein 1 (IFITM1) was the foremost basally downregulated immune gene. Stable IFITM1 overexpression in MV-susceptible cells resulted in a 50% increase in cell viability and a significant reduction in viral replication at 24 h after MV infection. Overall, our data indicate that the basal reduction in functions of the type 1 IFN pathway is a major contributor to the oncolytic selectivity of MV. In particular, we have identified IFITM1 as a restriction factor for oncolytic MV, acting at early stages of infection.