Immune‐mediated liver injury in hepatitis is due to activated T cells producing interferon‐γ (IFN‐γ). It is important to identify negative feedback immune mechanisms that can regulate T cell activity. In this study, we demonstrate that liver inflammation mediated by type 1 T helper (Th1) cells can induce the accumulation of myeloid‐derived suppressor cells (MDSCs), pleiomorphic cells capable of modulating T cell–mediated immunity, that heretofore have been studied almost exclusively in the context of tumor‐associated inflammation. Mice deficient in the gene encoding transforming growth factor‐β1 (Tgfb1^−/− mice) acutely develop liver necroinflammation caused by IFN‐γ–producing clusters of differentiation 4–positive (CD4⁺) T cells. Liver Th1 cell accumulation was accompanied by myeloid cells expressing CD11b and Gr1, phenotypic hallmarks of MDSCs. Isolated Tgfb1^−/− liver CD11b⁺Gr1⁺ cells were functional MDSCs, readily suppressing T cell proliferation in vitro. Pharmacologic inhibitors of inducible nitric oxide (NO) synthase completely eliminated suppressor function. Suppressor function and the production of NO were dependent on cell–cell contact between MDSCs and T cells, and upon IFN‐γ, and were specifically associated with the “monocytic” CD11b⁺Ly6G⁻ Ly6C^hi subset of liver Tgfb1^−/− CD11b⁺ cells. The rapid accumulation of CD11b⁺Gr1⁺ cells in Tgfb1^−/− liver was abrogated when mice were either depleted of CD4⁺ T cells or rendered unable to produce IFN‐γ, showing that Th1 activity induces MDSC accumulation. Conclusion: Th1 liver inflammation mobilizes an MDSC response that, through the production of NO, can inhibit T cell proliferation. We propose that MDSCs serve an important negative feedback function in liver immune homeostasis, and that insufficient or inappropriate activity of this cell population may contribute to inflammatory liver pathology. (HEPATOLOGY 2010;)