Myeloid-derived suppressor cells (MDSCs) play an important role in the regulation of the immune response. MDSC expansion occurs in many circumstances, including cancer, inflammation, stresses, and transplant tolerance. Liver transplants in mice are spontaneously accepted, but hepatocyte transplants are acutely rejected, suggesting the immunoregulatory activities of liver nonparenchymal cells. We have reported that hepatic stellate cells (HpSCs), the stromal cells in the liver, are immensely immunosuppressive and can effectively protect islet transplants via induction of MDSCs. The present study shows that the addition of HpSCs into dendritic cell (DC) culture promoted development of MDSCs, instead of DCs, which was highly dependent on complement component 3 (C3) from HpSCs. The C3 2/2 HpSCs lost their ability to induce MDSCs and, consequently, failed to protect the cotransplanted islet allografts. HpSCs produced complement activation factor B and factor D which then enhanced C3 cleavage to activation products iC3b and C3d. Addition of exogenous iC3b, but not C3d, into the DC culture led to the differentiation of MDSCs with potent immune-inhibitory function. These findings provide novel mechanistic insights into the differentiation of myeloid cells mediated by local tissue cells, and may assist in the development of MDSC-based therapy in clinical settings. (Blood. 2013;121(10):1760-1768