Current paradigms suggest that, despite the heterogeneity of myeloid‐derived suppressor cells (MDSC), all Gr‐1⁺CD11b⁺ cells can exert suppressive function when exposed to inflammatory stimuli. In vitro evaluation shows that MDSC from multiple tissue sites have suppressive activity, and in vivo inhibition of MDSC enhances T‐cell function; however, the relative capacity of MDSC present at localized inflammatory sites or in peripheral tissues to suppress T‐cell responses in vivo has not been directly evaluated. In the current study, we observed that during a tissue‐specific inflammatory response, MDSC inhibition of CD8⁺ T‐cell proliferation and IFN‐γ production was restricted to the inflammatory site. Using a prostate‐specific inflammatory model and a heterotopic prostate tumor model, we showed that MDSC from inflammatory sites or from tumor tissue possess immediate capacity to inhibit T‐cell function, whereas those isolated from peripheral tissues (spleens and liver) were not suppressive without activation of iNOS by exposure to IFN‐γ. These data suggest that MDSC are important regulators of immune responses in the prostate during acute inflammation and the chronic inflammatory setting of tumor growth, and that regulation of T‐cell function by MDSC during a localized inflammatory response is restricted in vivo to the site of an ongoing immune response.