Myeloid-derived suppressor cells (MDSC) play a key immunosuppressive role in various types of cancer, including head and neck squamous cell carcinoma (HNSCC). In this study, we characterized CD14+HLA-DR(-/lo) cells sorted from the tumors, draining lymph nodes, and peripheral blood of HNSCC patients. CD14+HLA-DR(-/lo) cells were phenotyped as CD11b+, CD33+, CD34+, arginase-I+, and ROS+. In all 3 compartments, they suppressed autologous, antigen-independent T cell proliferation in a differential manner. The abundance of MDSC correlated with stage, but did not correlate with previous treatment with radiation or subsites of HNSCC. Interestingly, MDSC from all 3 compartments showed high phosphorylated STAT3 levels that correlated with arginase-I expression levels and activity. Stattic, a STAT3-specific inhibitor, and STAT3-targeted siRNA abrogated MDSC’s suppressive function. Inhibition of STAT3 signaling also resulted in decreased arginase-I activity. Analysis of the human arginase-I promoter region showed multiple STAT3-binding elements, and ChIP demonstrated that phosphorylated STAT3 binds to multiple sites in the arginase-I promoter. Finally, rescue of arginase-I activity after STAT3 blockade restored MDSC’s suppressive function. Taken together, these results demonstrate that the suppressive function of arginase-I in both infiltrating and circulating MDSC is a downstream target of activated STAT3.