The expansion of myeloid derived suppressor cells (MDSCs), a suppressive population able to hamper the immune response against cancer, correlates with tumor progression and overall survival in several cancer types. We have previously shown that MDSCs can be induced in vitro from precursors present in the bone marrow and observed that these cells are able to actively proliferate in the presence of activated T cells, whose activation level is critical to drive the suppressive activity of MDSCs. Here we investigated at molecular level the mechanisms involved in the interplay between MDSCs and activated T cells. We found that activated T cells secrete IL-10 following interaction with MDSCs which, in turn, activates STAT3 phosphorylation on MDSCs then leading to B7-H1 expression. We also demonstrated that B7-H1+ MDSCs are responsible for immune suppression through a mechanism involving ARG-1 and IDO expression. Finally, we show that the expression of ligands B7-H1 and MHC class II both on in vitro-induced MDSCs and on MDSCs in the tumor microenvironment of cancer patients is paralleled by an increased expression of their respective receptors PD-1 and LAG-3 on T cells, two inhibitory molecules associated with T cell dysfunction. These findings highlight key molecules and interactions responsible for the extensive cross-talk between MDSCs and activated T cells that are at the basis of immune suppression.