Several studies have shown that development of hepatocellular carcinoma (HCC) generates a number of immune suppressive mechanisms in these patients. Myeloid-derived suppressor cells (MDSC) are a heterogeneous population of cells that have been shown to inhibit T-cell responses in tumor-bearing mice, but little is known about these cells in humans owing to a lack of specific markers. In this study, we have investigated the frequency and function of a new population of MDSC denoted here as CD14(+)HLA-DR(-/low) in HCC patients. We have also identified a novel, MDSC-mediated immune regulatory pathway in these patients. We have directly isolated and characterized MDSCs for phenotype and function from peripheral blood (n = 111) and tumor (n = 12) of patients with HCC. The frequency of CD14(+)HLA-DR(-/low) cells in peripheral blood mononuclear cells (PBMC) from HCC patients was significantly increased in comparison with healthy controls. CD14(+) HLA-DR(-/low) cells were unable to stimulate an allogeneic T-cell response, suppressed autologous T-cell proliferation, and had high arginase activity, a hallmark characteristic of MDSC. Most important, CD14(+)HLA-DR(-/low) cells from HCC patients induced a CD4(+)CD25(+)Foxp3(+) regulatory T-cell population when cocultured with autologous T cells. CD14(+)HLA-DR(-/low) cells are a new population of MDSC increased in blood and tumor of HCC patients. We propose a new mechanism by which MDSC exert their immunosuppressive function, through the induction of CD4(+)CD25(+)Foxp3(+) regulatory T cells in cocultured CD4(+) T cells. Understanding the mechanism of action of MDSC in HCC patients is important in the design of effective immunotherapeutic protocols.