Chronic inflammation is known to be associated with prostate cancer development, but how epithelium-associated cancer-initiating events cross talk to inflammatory cells during prostate cancer initiation and progression is largely unknown. Using the Pten null murine prostate cancer model, we show an expansion of Gr-1(+) CD11b(+) myeloid-derived suppressor cells (MDSCs) occurring intraprostatically immediately following epithelium-specific Pten deletion without expansion in hematopoietic tissues. This MDSC expansion is accompanied by sustained immune suppression. Prostatic Gr-1(+) CD11b(+) cells, but not those isolated from the spleen of the same tumor-bearing mice, suppress T cell proliferation and express high levels of Arginase 1 and iNOS. Mechanistically, the loss of PTEN in the epithelium leads to a significant upregulation of genes within the inflammatory response and cytokine-cytokine receptor interaction pathways, including Csf1 and Il1b, two genes known to induce MDSC expansion and immunosuppressive activities. Treatment of Pten null mice with the selective CSF-1 receptor inhibitor GW2580 decreases MDSC infiltration and relieves the associated immunosuppressive phenotype. Our study indicates that epithelium-associated tumor-initiating events trigger the secretion of inflammatory cytokines and promote localized MDSC expansion and immune suppression, thereby promoting tumor progression.