Tumor microenvironment (TME) represents a unique immunological niche that contributes to the observed resistance to immune checkpoint blockade (ICB) therapy. Here we describe our efforts to understand the role of TME during early differentiation of CD8 T cells in response to tumor antigens. For this, we stably expressed the dominant MHCI-restricted LCMV-derived epitope GP33, in MC38 tumor cells. Co-expression of a reporter gene encoding for mCherry allows detection of antigen presentation. Subcutaneous inoculation of MC38-GP33 cells into immunocompetent syngeneic hosts resulted in a massive expansion of highly functional CD8 effector cells in peripheral lymphoid tissues. In contrast, tumor-infiltrating GP33-reactive CD8 cells showed a striking impairment in their ability to produce effector cytokines (IFNγ/TNFα/IL-2). This tumor-associated suppression is mediated by the PD1/PDL1 axis since PDL1 blockade partially recovered the immunomodulatory properties. Genetic ablation of B2m gene in tumor cells resulted in a decreased expansion of GP33-specific CD8 T cells. The absence of direct antigen-presentation by tumor cells had no impact on the tumor-induced dysfunction of T cells. Importantly, PDL1 blockade also failed to recover the functionality of CD8 TILs in the B2mKO tumors, indicating that antigen cross-presentation by myeloid cells in TME skews differentiation of CD8 T cells to an ICB non-responsive state. Aligned with these findings, analysis of immune infiltrates from pediatric solid tumors revealed a strong correlation between expression of PDL1 on myeloid cells and enrichment of CD8 TILs with an exhaustion phenotype. Collectively our findings identify tumor-associated monocytes/macrophages as a potential driver of antigen-induced CD8 T cell dysfunction.