Background The immunosuppressive microenvironment in pancreatic ductal adenocarcinoma is a major factor that limits the benefits of immunotherapy, especially immune checkpoint blockade. One viable strategy for reverting the immunosuppressive conditions is the use of an oncolytic virus (OV) in combination with other immunotherapy approaches. Infection of PDAC cells with a robust OV can change the tumor microenvironment and increase tumor antigen release by its lytic activities. These changes in the tumor may improve responses to immunotherapy, including immune checkpoint blockade. However, a more potent OV may be required for efficiently infecting pancreatic tumors that may be resistant to OV. Methods Vesicular stomatitis virus, a rapid replicating OV, was armed to express the Smac protein during virus infection (VSV-S). Adaptation by limited dilution largely increased the selective infection of pancreatic cancer cells by VSV-S. The engineered OV was propagated to a large quantity and evaluated for their antitumor activities in an animal model. Results In a syngeneic KPC model, intratumoral injection of VSV-S inhibited tumor growth, and induced increasing tumor infiltration of neutrophils and elimination of myeloid derived suppressor cells and macrophages in the tumor. More importantly, M2-like macrophages were eliminated preferentially over those with an M1 phenotype. Reduced levels of arginase 1, TGF-β and IL-10 in the tumor also provided evidence for reversion of the immunosuppressive conditions by VSV-S infection. In several cases, tumors were completely cleared by VSV-S treatment, especially when combined with anti-PD-1 therapy. A long-term survival of 44% was achieved. Conclusions The improved OV, VSV-S, was shown to drastically alter the immune suppressive tumor microenvironment when intratumorally injected. Our results suggest that the combination of potent OV treatment with immune checkpoint blockade may be a promising strategy to treat pancreatic cancer more effectively.