Tumor-induced T-cell tolerance is a major mechanism that facilitates tumor progression and limits the efficacy of immune therapeutic interventions. Regulatory T cells (Treg) play a central role in the induction of tolerance to tumor antigens, yet the precise mechanisms regulating its induction in vivo remain to be elucidated. Using the A20 B-cell lymphoma model, here we identify myeloid-derived suppressor cells (MDSC) as the tolerogenic antigen presenting cells capable of antigen uptake and presentation to tumor-specific Tregs. MDSC-mediated Treg induction requires arginase but is transforming growth factor-β independent. In vitro and in vivo inhibition of MDSC function, respectively, with NOHA or sildenafil abrogates Treg proliferation and tumor-induced tolerance in antigen-specific T cells. These findings establish a role for MDSCs in antigen-specific tolerance induction through preferential antigen uptake mediating the recruitment and expansion of Tregs. Furthermore, therapeutic interventions, such as in vivo phosphodiesterase 5–inhibition, which effectively abrogate the immunosuppressive role of MDSCs and reduce Treg numbers, may play a critical role in delaying and/or reversing tolerance induction. [Cancer Res 2008;68(13):5439–49]