The accumulation of myeloid suppressor cells (MSCs) is associated with immune suppression in tumor-bearing mice and in cancer patients. The suppressive activity of MSC correlates with the expression of the myeloid markers Gr-1, CD115 (macrophage colony-stimulating factor receptor), and F4/80. Gr-1(+)CD115(+) MSCs, in addition to being able to suppress T-cell proliferation in vitro, can induce the development of Foxp3(+) T regulatory cells (Treg) in vivo, which are anergic and suppressive. Furthermore, the secretion of interleukin (IL)-10 and transforming growth factor-beta by Gr-1(+)CD115(+) MSCs was induced and enhanced, respectively, on IFN-gamma stimulation. The development of Treg requires antigen-associated activation of tumor-specific T cells, depends on the presence of IFN-gamma and IL-10, and is independent of the nitric oxide-mediated suppressive mechanism by MSC. Our data provide evidence that Gr-1(+)CD115(+) MSC can mediate the development of Treg in tumor-bearing mice and show a novel immune suppressive mechanism by which MSCs can suppress antitumor responses.