Tumor-associated macrophages (TAMs) are a key component of tumor-infiltrating immune cells. Macrophages are largely characterized as M1 or M2 types, and TAMs have been shown to express an M2-like phenotype. TAMs endorse tumor progression and contribute to resistance to chemotherapies. However, it is unclear what the composition of M2 macrophages is in patients with Juvenile myelomonocytic leukemia (JMML) and how do these cells mechanistically contribute to JMML and/or relapse after bone marrow transplantation. To study the role of M2- TAMs in JMML development, we first examined the bulk RNA-sequence data in 90 JMML patients. These data demonstrated a significant increase in the expression of arginase-1 (Arg-1) and programmed cell death-1 (PD-1). Furthermore, single cell RNA-sequencing analysis of monocytes/macrophages from 4 JMML patients revealed higher expression of M2- macrophage markers/genes such as IL-10, CD163, MRC1/CD206, TGF-β1 and IL-1R1 compared to M1 macrophage (CD80, CCR7, IL-6, CXCL10, CXCL11 and TNF) expression. We hypothesized that in JMML, inflammatory myeloid cells including neutrophils and M2-macrophages express higher levels of arginase and PD-1, which may contribute to the local suppression of immune responses and damage the bone marrow microenvironment (BME) leading to poor engraftment of normal donor cells, resulting in relapse. To study how alterations in bone marrow (BM) macrophages (M1/M2) contribute to JMML development and relapse, we utilized a mouse model bearing Shp2 E76K mutation (Ptpn11 E76K/+) driven by lysosome-cre (Ptpn11 E76K/+; LysM-Cre+, indicated as Shp2* mice hereafter). This model is frequently used to study JMML as it manifests cardinal features of human JMML. In a competitive transplantation experiment using, Shp2* + Boy/J BM cells (1:1 ratio) transplanted into lethally irradiated Shp2* recipient mice, we show that Shp2* mutant cells out compete WT BoyJ cells and result in rapid growth of CD45.2+ Shp2* mutant mature myeloid cells, hematopoietic stem and progenitors (HSC/Ps) and M2- macrophages (F4/80+/CD206+) in the BM and spleen leading to leukemia relapse. To determine if modulating Arg-1 and PD-1/PD-L1 levels in the background of Shp2* mutant leukemic stem cells in Shp2* recipients would alter the overall engraftment and JMML development and relapse, we again performed a competitive transplantation experiment using, Shp2* + Boy/J (BM cells, 1:1 ratio) into Shp2* and WT recipient mice. After 8 weeks post transplantation, we investigated the role of Arg-1 and PD-L1 in Shp2* recipients using pharmacological inhibitors, CB-1158 (Arg-1 inhibitor; 100 mg/kg, orally) + anti-PD-L1 antibody (10 mg/kg, i.p) for 30 days. The Arg-1 + PD-L1 treatment significantly reduced the number of white blood cells, neutrophils, monocytes and improved RBC and platelet counts. The spleen and liver weights were significantly rescued as well. Interestingly, CD45.1 WT donor cells in the PB, BM, and spleen were significantly increased and a significant reduction of Shp2* mutant CD45.2+ mature myeloid cells in the PB, BM, and spleen was observed. Importantly, the frequency and absolute number of leukemic blasts, LSK (Lin-/Sca1+/c-KIT+) cells, short term hematopoietic cells (ST-HSCs), common myeloid progenitors (CMP), granulocyte macrophage progenitors (GMP) and megakaryocyte erythroid progenitors (MEP) were significantly reduced. Furthermore, the M2- TAMs were significantly reduced in the BM and spleen of Arg-1 + PD-L1 drug treated group compared to vehicle treated mice. Notably the CD8+ T-cells (IFN-γ+ and TNF-α+) were significantly improved in the drug treated mice. These data suggest that the suppression of arginase-1 allows for the arginine levels to increase, which promotes the proliferation of T-cells. Increasing arginine levels also promotes an anti-tumor immune response resulting in the emergence of CD45.1 WT HSCs as opposed to mutant CD45.2 HSCs, suggesting that Arg-1 + PD-L1 treatment is a novel therapeutic approach to treat patients with JMML and for preventing leukemia relapse after BM transplantation. DisclosuresNo relevant conflicts of interest to declare.