Myeloid-derived suppressor cells (MDSCs) are a well-defined population of cells that accumulate in the tissue of tumor-bearing animals and are known to inhibit immune responses. Within 4 days, bone marrow cells cultured in granulocyte colony-stimulating factor and granulocyte-macrophage colony-stimulating factor resulted in the generation of CD11b(+)Ly6G(lo)Ly6C(+) MDSCs, the majority of which are interleukin-4Rα (IL-4Rα(+)) and F4/80(+). Such MDSCs potently inhibited in vitro allogeneic T-cell responses. Suppression was dependent on L-arginine depletion by arginase-1 activity. Exogenous IL-13 produced an MDSC subset (MDSC-IL-13) that was more potently suppressive and resulted in arginase-1 up-regulation. Suppression was reversed with an arginase inhibitor or on the addition of excess L-arginine to the culture. Although both MDSCs and MDSC-IL-13 inhibited graft-versus-host disease (GVHD) lethality, MDSC-IL-13 were more effective. MDSC-IL-13 migrated to sites of allopriming. GVHD inhibition was associated with limited donor T-cell proliferation, activation, and proinflammatory cytokine production. GVHD inhibition was reduced when arginase-1-deficient MDSC-IL-13 were used. MDSC-IL-13 did not reduce the graft-versus-leukemia effect of donor T cells. In vivo administration of a pegylated form of human arginase-1 (PEG-arg1) resulted in L-arginine depletion and significant GVHD reduction. MDSC-IL-13 and pegylated form of human arginase-1 represent novel strategies to prevent GVHD that can be clinically translated.