Enhanced bone destruction is a hallmark of various carcinomas such as breast cancer, where osteolytic bone metastasis is associated with increased morbidity and mortality. Immune cells contribute to osteolysis in cancer growth, but the factors contributing to aggressive bone destruction are not well understood. In this study, we show the importance of myeloid-derived suppressor cells (MDSC) in this process at bone metastatic sites. Because MDSC originate from the same myeloid lineage as macrophages, which are osteoclast precursors, we hypothesized that MDSC may undergo osteoclast differentiation and contribute to enhanced bone destruction and tumor growth. Using an immunocompetent mouse model of breast cancer bone metastasis, we confirmed that MDSC isolated from the tumor-bone microenvironment differentiated into functional osteoclasts both in vitro and in vivo. Mechanistic investigations revealed that nitric oxide signaling was critical for differentiation of MDSC into osteoclasts. Remarkably, osteoclast differentiation did not occur in MDSC isolated from control or tumor-bearing mice that lacked bone metastasis, signifying the essential cross-talk between tumor cells and myeloid progenitors in the bone microenvironment as a requirement for osteoclast differentiation of MDSC. Overall, our results identify a wholly new facet to the multifunctionality of MDSC in driving tumor progression, in this case as a novel osteoclast progenitor that specifically drives bone metastasis during cancer progression. © 2012 AACR.