Background: Polymorphonuclear myeloid-derived suppressor cells (PMN-MDSCs) are an immature cell type that inhibits the effector functions of T lymphocytes in chronic HIV infection. A well-known immunological feature of the disease course is the development of immune exhaustion, which is correlated with excessive immune activation in late-stage disease. Here, we hypothesized that immune exhaustion would also affect PMN-MDSCs in late-stage HIV-1 infection. Methods: We evaluated untreated chronically HIV-infected patients (progressors, n = 10) and control groups (controllers, patients with non-small cell lung carcinoma and healthy controls, n = 16) with regard to levels of PMN-MDSCs and their inhibitory potential. Additionally, we studied CD8 T cell effector functions (interferon-gamma, TNF alpha, IL-2 and CD107) and parameters of CD8 T cell activation (CD38 and HLA-DR) and exhaustion (PD-1 and LAG-3) by flow cytometry. Plasma inflammation markers analyzed here were IL-6, IL-8, soluble CD14, highly sensitive CRP, and cystatin C. Results: Coincubation experiments with isolated PMN-MDSCs led to a significant inhibition of CD8 T cell proliferation (p < 0.0001), with a significant correlation between PMN-MDSC frequency and suppressive capacity: the higher the frequency of PMN-MDSCs was, the lower the suppressive capacity (rho = 0.51, p = 0.0082). Stratifying all study subjects into subgroups with PMN-MDSC frequencies above or below 2.5% resulted in a significantly increased suppressive capacity in patients with frequencies below 2.5% (p = 0.021). While there was no correlation with the cellular activation markers CD38 and HLA-DR, high IL-8 levels were significantly associated with high PMN-MDSC frequencies (rho = 0.52, p = 0.0074) and low suppressive capacity (rho = 0.47, p = 0.019). Conclusions: In this study, we demonstrate for the first time that PMN-MDSCs show limited effector functions in advanced disease stages of HIV infection. The hyperactive immune state is associated with this loss of function. However, we show an association with the proinflammatory cytokine IL-8, which is an important factor for the migration and adhesion of polymorphonuclear cells.