Effective immunotherapy for type 1 diabetes (T1D) relies on active induction of peripheral tolerance. Myeloid-derived suppressor cells (MDSCs) play a critical role in suppressing immune responses in various pathologic settings via multiple mechanisms, including expansion of regulatory T cells (Tregs). In this study, we investigated whether MDSCs could act as APCs to induce expansion of Ag-specific Tregs, suppress T cell proliferation, and prevent autoimmune T1D development. We found that MDSC-mediated expansion of Tregs and T cell suppression required MHC-dependent Ag presentation. A murine T1D model was established in INS-HA/RAG−/− mice in which animals received CD4-HA-TCR transgenic T cells via adoptive transfer. We found a significant reduction in the incidence of diabetes in recipients receiving MDSC plus HA, but not OVA peptide, leading to 75% diabetes-free mice among the treated animals. To test further whether MDSCs could prevent diabetes onset in NOD mice, nondiabetic NOD/SCID mice were injected with inflammatory T cells from diabetic NOD mice. MDSCs significantly prevented diabetes onset, and 60% of MDSC-treated mice remained diabetes free. The pancreata of treated mice showed significantly lower levels of lymphocyte infiltration in islet and less insulitis compared with that of the control groups. The protective effects of MDSCs might be mediated by inducing anergy in autoreactive T cells and the development of CD4+ CD25+ Foxp3+ Tregs. Thist study demonstrates a remarkable capacity of transferred MDSCs to downregulate Ag-specific autoimmune responses and prevent diabetes onset, suggesting that MDSCs possess great potential as a novel cell-based tolerogenic therapy in the control of T1D and other autoimmune diseases.