It is well established that tumor progression is associated with the accumulation of myeloid suppressive cells, which in mice include Gr-1+ immature myeloid cells and F4/80+ macrophages. The paradox is that with the exception of terminal stages of the disease or chemotherapy treatment, tumor-bearing mice or cancer patients do not display a profound systemic immune suppression. We therefore raised the question as to whether myeloid cell-mediated T cell suppression is controlled at a local level at the site of the tumor. We have demonstrated that after adoptive transfer to tumor-bearing recipients, Gr-1+ (immature myeloid cells) freshly isolated from spleens of tumor-bearing mice become F4/80+ tumor-associated macrophages (TAM). These TAM, but not F4/80+ macrophages or Gr-1+ cells freshly isolated from spleens of tumor-bearing or naive mice were able to inhibit T cell-mediated immune response in vitro via induction of T cell apoptosis. Arginase and NO were both responsible for the apoptotic mechanism, and were seen only in TAM, but not in freshly isolated Gr1+ cells. Using the analysis of STAT activity in combination with STAT knockout mice, we have determined that STAT1, but not STAT3 or STAT6, was responsible for TAM-suppressive activity.