This study investigates the function and differentiation of myeloid-derived suppressor cells (MDSCs) in the tumor microenvironment, comparing MDSCs from peripheral lymphoid organs and tumor sites. MDSCs from both sources share similar phenotypes but exhibit distinct functional differences. MDSCs from peripheral lymphoid organs suppress antigen-specific CD8+ T cells but do not inhibit nonspecific T cell function, while tumor MDSCs suppress both antigen-specific and nonspecific T cell activity. The tumor microenvironment rapidly up-regulates arginase I and inducible nitric oxide synthase (iNOS) in MDSCs, leading to down-regulation of nicotinamide adenine dinucleotide phosphate–oxidase and reactive oxygen species (ROS). Unlike spleen MDSCs, tumor MDSCs rapidly differentiate into macrophages. Exposure of spleen MDSCs to hypoxia results in their conversion to nonspecific suppressors and preferential differentiation into macrophages. Hypoxia-inducible factor (HIF) 1α is identified as the primary regulator of these effects, altering MDSC function and differentiation in the tumor microenvironment. The study provides a mechanistic link between different myeloid suppressive cells in the tumor microenvironment.This study investigates the function and differentiation of myeloid-derived suppressor cells (MDSCs) in the tumor microenvironment, comparing MDSCs from peripheral lymphoid organs and tumor sites. MDSCs from both sources share similar phenotypes but exhibit distinct functional differences. MDSCs from peripheral lymphoid organs suppress antigen-specific CD8+ T cells but do not inhibit nonspecific T cell function, while tumor MDSCs suppress both antigen-specific and nonspecific T cell activity. The tumor microenvironment rapidly up-regulates arginase I and inducible nitric oxide synthase (iNOS) in MDSCs, leading to down-regulation of nicotinamide adenine dinucleotide phosphate–oxidase and reactive oxygen species (ROS). Unlike spleen MDSCs, tumor MDSCs rapidly differentiate into macrophages. Exposure of spleen MDSCs to hypoxia results in their conversion to nonspecific suppressors and preferential differentiation into macrophages. Hypoxia-inducible factor (HIF) 1α is identified as the primary regulator of these effects, altering MDSC function and differentiation in the tumor microenvironment. The study provides a mechanistic link between different myeloid suppressive cells in the tumor microenvironment.