NK cells, the important effector of innate immunity, play critical roles in the antitumor immunity. Myeloid-derived suppressor cells (MDSC), a population of CD11b(+)Gr-1(+) myeloid cells expanded dramatically during tumor progression, can inhibit T cells and dendritic cells, contributing to tumor immune escape. However, regulation of NK cell innate function by MDSC in tumor-bearing host needs to be investigated. In this study, we found that the function of NK cells from liver and spleen was impaired significantly in all tumor-bearing models, indicating the impairment of hepatic NK cell function by tumor is a universal phenomenon. Then we prepared the orthotopic liver cancer-bearing mice as tumor model to investigate how hepatic NK cells are impaired. We show that down-regulation of NK cell function is inversely correlated with the marked increase of MDSC in liver and spleen. MDSC inhibit cytotoxicity, NKG2D expression, and IFN-gamma production of NK cells both in vitro and in vivo. After incubation with MDSC, NK cells could not be activated to produce IFN-gamma. Furthermore, membrane-bound TGF-beta1 on MDSC is responsible for MDSC-mediated suppression of NK cells. The impaired function of hepatic NK cells in orthotopic liver cancer-bearing mice could be restored by depletion of MDSC, but not regulatory T cells. Therefore, cancer-expanded MDSC can induce anergy of NK cells via membrane-bound TGF-beta1. MDSC, but not regulatory T cells, are main negative regulator of hepatic NK cell function in tumor-bearing host. Our study provides new mechanistic explanations for tumor immune escape.