The programmed death-1 (PD-1) and the PD ligand 1 (PD-L1) interaction represents a key immune checkpoint within the tumor microenvironment (TME), and PD-1 blockade has led to exciting therapeutic advances in clinical oncology. Although IFN-γ-dependent PD-L1 induction on tumor cells was initially thought to mediate the suppression on effector cells, recent studies have shown that PD-L1 is also expressed at high level on tumor-associated macrophages (TAMs) in certain types of tumors. However, the precise role of PD-L1 expression on TAMs in suppressing antitumor immunity within the TME remains to be defined. Using a myeloid-specific Pdl1-knockout mouse model, here we showed definitive evidence that PD-L1 expression on TAMs is critical for suppression of intratumor CD8+ T cell function. We further demonstrated that tumor-derived Sonic hedgehog (Shh) drives PD-L1 expression in TAMs to suppress tumor-infiltrating CD8+ T cell function, leading to tumor progression. Mechanistically, Shh-dependent upregulation of PD-L1 in TAMs is mediated by signal transducer and activator of transcription 3, a cascade that has not been previously reported to our knowledge. Last, single-cell RNA sequencing analysis of human hepatocellular carcinoma revealed that PD-L1 is mainly expressed on M2 TAMs, supporting the clinical relevance of our findings. Collectively, our data revealed an essential role for Shh-dependent PD-L1 upregulation in TAMs in suppressing antitumor immunity within the TME, which could lead to the development of new immunotherapeutic strategies for treating cancer. Keywords: Cancer; Immunology; T cells.