Lysosomal acid lipase (LAL) is a key enzyme that cleaves cholesteryl esters and triglycerides to generate free fatty acids and cholesterol in lysosomes. Genetic ablation of the lal gene (lal(-/-)) in mice has resulted in a systemic increase of macrophages and neutrophils, causing severe inflammation and pathogenesis in multiple organs. We hypothesized that aberrant growth and differentiation of myeloid cells in lal(-/-) mice arises from dysregulated production of progenitor cells in the bone marrow. Indeed, lal(-/-) mice displayed increased numbers of primitive lin(-)Sca-1(+)c-Kit(+) (LSK) cells and granulocyte-macrophage precursors (GMP). Increased high proliferative potential colony-forming cells (HPP-CFC) were enumerated from cultured lal(-/-) bone marrow cells, as were significantly more CFU-GM, CFU-G, and CFU-M colonies. As a consequence, lal(-/-) mice developed significant myeloid infiltration, particularly with CD11b+/Gr-1+ myeloid-derived suppressive cells in multiple organs. Both decreased apoptosis and increased proliferation contribute to the systemic increase of myeloid cells in lal(-/-) myeloid cells. These lal(-/-) CD11b(+)/Gr-1(+) cells displayed suppressive activity on T cell proliferation and function in vitro. Bone marrow chimeras confirmed that the myeloproliferative disorder in lal(-/-) mice was primarily attributable to autonomous defects in myeloid progenitor cells, although the hematopoietic microenvironment in the lal(-/-) mice did not support hematopoiesis normally. These results provide evidence that LAL is an important regulator of myelopoiesis during hematopoietic development, differentiation, and homeostasis.