A major barrier to effective cancer immunotherapy is immune suppression in favor of tumor progression. Additionally, the accumulation of myeloid-derived suppressor cells (MDSCs) has recently been recognized as a major mechanism of the promotion of immune suppression. However, how MDSCs are induced and the cells from which they arise remains unknown. Although studies have demonstrated that tumor-derived cytokines promote MDSC accumulation and activation, little is known regarding the role of the tumor stroma in MDSC accumulation and activation. In this study, we identified a novel mechanism of MDSC differentiation. Tumor-associated fibroblasts (TAFs) attracted monocytes by the stromal cell-derived factor (SDF)-1a/CXCR4 pathway and induced their differentiation into MDSCs through interleukin (IL)-6-mediated STAT3 activation. TAF-treated monocytes (T-MDSCs) then impaired T-cell proliferation and altered the phenotype and/or function of T-cells in an STAT3-dependent manner. CD11b+ myeloid cells, which resembled T-MDSCs both phenotypically and functionally, were primarily in the peritumoral stroma and a positive association with TAFs in vivo. Additionally, a negative association between CD11b+ myeloid cell densities and overall survival was observed. An increased number of stromal CD11b+ myeloid cells was correlated with Hepatocellular Carcinoma (HCC) progression. Together, our results are the first to show that TAF-derived cytokines, such as IL-6 and SDF-1a, can induce MDSC generation and activation and then impair human anti-tumor immune responses, which create favorable conditions for HCC progression. These data also suggest an important role for STAT3 activation in TAF-mediated MDSC generation and MDSC-mediated immune suppression. Consequently, methods in which immunotherapy is combined with IL-6, SDF-1a or STAT3 inhibition may offer an improved option to eliminate suppressive CD11b+ myeloid cells in HCC patients.