Inflammation and cancer are associated with impairment of T-cell responses by a heterogeneous population of myeloid-derived suppressor cells (MDSCs) coexpressing CD11b and GR-1 antigens. MDSCs have been recently implicated in costimulation blockade-induced transplantation tolerance in rats, which was under the control of inducible NO synthase (iNOS). Herein, we describe CD11b+GR-1+MDSC-compatible cells appearing after repetitive injections of lipopolysaccharide (LPS) using a unique mechanism of suppression. These cells suppressed T-cell proliferation and Th1 and Th2 cytokine production in both mixed lymphocyte reaction and polyclonal stimulation assays. Transfer of CD11b+ cells from LPS-treated mice in untreated recipients significantly prolonged skin allograft survival. They produced large amounts of IL-10 and expressed heme oxygenase-1 (HO-1), a stress-responsive enzyme endowed with immunoregulatory and cytoprotective properties not previously associated with MDSC activity. HO-1 inhibition by the specific inhibitor, SnPP, completely abolished T-cell suppression and IL-10 production. In contrast, neither iNOS nor arginase 1 inhibition did affect suppression. Importantly, HO-1 inhibition before CD11b+ cell transfer prevented the delay of allograft rejection revealing a new MDSC-associated suppressor mechanism relevant for transplantation.