Elevated concentrations of tumor necrosis factor-α (TNF-α) are detected in pathologies characterized by chronic inflammation. Whether TNF-α plays a role in manipulating the host's immune system toward generating an immunosuppressive milieu, typical of ongoing chronic inflammation, is unclear. Here we showed that TNF-α exhibited a dual function during chronic inflammation: arresting differentiation of immature myeloid-derived suppressor cells (MDSCs) primarily via the S100A8 and S100A9 inflammatory proteins and their corresponding receptor (RAGE) and augmenting MDSC suppressive activity. These functions led to in vivo T and NK cell dysfunction accompanied by T cell antigen receptor ζ chain downregulation. Furthermore, administration of etanercept (TNF-α antagonist) during early chronic inflammatory stages reduced MDSCs' suppressive activity and enhanced their maturation into dendritic cells and macrophages, resulting in the restoration of in vivo immune functions and recovery of ζ chain expression. Thus, TNF has a fundamental role in promoting an immunosuppressive environment generated during chronic inflammation.