Graft-versus-host disease (GVHD) is a major barrier to the widespread use of allogeneic hematopoietic stem cell transplantation (allo-HSCT) for treating hematologic malignancies. Myeloid-derived suppressor cells (MDSCs) have been recognized as crucial immunosuppressive cells in various pathologic settings. Here, we investigated whether the unique functional properties of MDSCs could be harnessed to control allo-HSCT-associated GVHD. Using multiple murine GVHD/GVL models including both MHC-mismatched and miHA-mismatched, we demonstrated that treatment with CD115+ MDSCs efficiently suppressed GVHD but did not significantly impair graft-versus-leukemia (GVL) activity, leading to 80 and 67% protection in treated mice in GVHD and GVL models, respectively. The mechanism for this dissociation of GVHD from GVL, specifically the emergence of donor-derived NKG2D+ CD8 T cells with a memory phenotype in MDSC-treated recipient mice, was identified. NKG2D expression on donor T cells was required for eradication of allogeneic lymphoma cells. Furthermore, long-term surviving MDSC recipients that exhibited cytolytic activities against allogeneic leukemia cells had a significantly increased percentage of T regulatory cells and, more importantly, NKG2D+ CD8 T cells. These findings indicate that MDSCs can be used as a novel cell-based therapy to suppress GVHD while maintaining GVL activities through selective induction of NKG2D+ CD8 memory T cells.