Tumor-associated macrophages are major contributors to malignant progression and resistance to immunotherapy, but the mechanisms governing their differentiation from immature myeloid precursors remain incompletely understood. In this study, we demonstrate that exosomes secreted by human and mouse tumor-educated mesenchymal stem cells (MSCs) drive accelerated breast cancer progression by inducing differentiation of monocytic myeloid-derived suppressor cells into highly immunosuppressive M2-polarized macrophages at tumor beds. Mechanistically, MSC-derived exosomes but not exosomes from tumor cells contain TGF-β, C1q, and semaphorins, which promote myeloid tolerogenic activity by driving PD-L1 overexpression in both immature myelomonocytic precursors and committed CD206 macrophages and by inducing differentiation of MHC class II macrophages with enhanced l-Arginase activity and IL-10 secretion at tumor beds. Accordingly, administration of tumor-associated murine MSC-derived exosomes accelerates tumor growth by dampening antitumor immunity, and macrophage depletion eliminates exosome-dependent differences in malignant progression. Our results unveil a new role for MSC-derived exosomes in the differentiation of myeloid-derived suppressor cells into macrophages, which governs malignant growth.