Impaired T cell function in sepsis is associated with poor outcome, but the mechanisms are unclear. In cancer, arginase-expressing myeloid derived suppressor cells (MDSCs) deplete arginine, impair T cell receptor CD3 zeta-chain expression and T cell function and are linked to poor clinical outcome, but their role during acute human infectious disease and in particular sepsis remains unknown. Hypoarginemia is prevalent in sepsis. This study aimed to determine whether neutrophils that co-purify with PBMC express arginase, and if arginine depletion constrains T cell CD3 zeta-chain expression and function in human sepsis. Using flow cytometry, cell culture, HPLC, arginase activity and mRNA detection, our study examined whether neutrophils, with reduced buoyant density isolated in the Ficoll interface, metabolise L-arginine and suppress T cell proliferation in sepsis. A total of 35 sepsis patients (23 with septic shock) and 12 hospital controls in a tertiary referral hospital in tropical Australia were evaluated. Only sepsis patients had interphase neutrophils, neutrophils co-purifying with mononuclear cells (≤1.077 specific gravity). The percentage of interphase neutrophils in sepsis was proportional to sepsis severity and correlated with plasma IL-6 concentrations. Ex vivo, sepsis-derived interphase neutrophils expressed arginase, metabolised culture L-arginine and suppressed T cell proliferation and CD3 zeta-chain expression. In vivo, in septic shock there was a longitudinal inverse association between interphase neutrophil number and CD3 zeta-chain expression. Depletion or inhibition of interphase neutrophils in vitro restored zeta-chain expression and T cell function. For the first time during an acute human infection, interphase neutrophils that express arginase were found to circulate in sepsis, in proportion to disease severity. These neutrophil-MDSCs impair T cell CD3 zeta-chain expression and T cell function via L-arginine metabolism, and likely contribute to the T cell dysfunction seen in sepsis. Modulation of neutrophil-MDSC or their downstream effects warrant consideration as targets for novel adjunctive therapies in sepsis.