Tumors can suppress the host immune system by employing a variety of cellular immune modulators, such as regulatory T cells, tumor-associated macrophages and myeloid-derived suppressor cells (MDSC). In the peripheral blood of advanced stage melanoma patients, there is an accumulation of CD14+HLA-DRlo/- MDSC that suppress autologous T cells ex vivo in a STAT-3-dependent manner. However, precise mechanistic basis underlying this effect is unclear, particularly with regard to whether the MDSC induction mechanism relies on cell-cell contact of melanoma cells with CD14+ cells. Here we show that early-passage human melanoma cells induce phenotypic changes in CD14+ monocytes, leading them to resemble MDSCs characterized in advanced stage melanoma patients. These MDSC-like cells potently suppress autologous T cell proliferation and IFN-γ production. Notably, induction of myeloid suppressive functions requires contact or close proximity between monocytes and tumor cells. Further, this induction is largely dependent on production of cyclooxygenase-2 (COX-2) since its inhibition in these MDSC-like cells limits their ability to suppress T cell function. We confirmed our findings with CD14+ cells isolated from advanced stage melanoma patients, which inhibited autologous T cells in a manner relying up prostaglandin E2 (PGE2), STAT-3 and superoxide. Indeed, PGE2 was sufficient to confer to monocytes the ability to suppress proliferation and IFN-γ production by autologous T cells ex vivo. In summary, our results reveal how immune suppression by MDSC can be initiated in the tumor microenvironment of human melanoma.