Production of high levels of granulocyte-macrophage CSF (GM-CSF) by LLC-LN7 tumors results in myelopoietic stimulation and an increase in cells having natural suppressor (NS) activity. Prior studies showed these NS cells could be isolated from the bone marrow of tumor-bearing mice with an Ab (ER-MP12) that recognized GM-progenitor cells. The present study showed these cells to also be in the spleen, lymph node, and tumor, and that treatment of tumor-bearing mice with low doses of IFN-gamma plus TNF-alpha reduced the frequency of E-MP12+ cells. Studies focused on characterizing the intratumoral ER-MP12+ cells and the mechanism by which they suppress T cell proliferation. When isolated and seeded in soft agar with CSF-containing LLC-LN7 supernatants, the ER-MP12+ cells grew into colonies, most of which contained both granulocytic and monocytic cells. Tumor-derived ER-MP12+ cells and their culture supernatants were suppressive to T cell proliferation. Among the factors produced by ER-MP12+ cells were TGF-beta, nitric oxide (NO), IL-10, and prostaglandin E2 (PGE2). However, it was TGF-beta and NO that mediated the suppression of T cell proliferation by ER-MP12+ cells. Intratumoral ER-MP12+ cells could be maintained as suppressive blastlike cells for at least 4 days in cultures containing CSFs, but adding IFN-gamma plus TNF-alpha to these cultures caused their differentiation mainly into nonsuppressive TNF-alpha-secreting monocytic cells. These results show that intratumoral ER-MP12+ cells having homology to GM-progenitor cells suppress T cell function by producing TGF-beta and NO. IFN-gamma/TNF-alpha treatment stimulates their differentiation and shift from production of TGF-beta and NO to production of TNF-alpha.