The crosstalk between NK cells and M1 macrophages has a vital role in the protection against infections and tumor development. However, macrophages in the tumor resemble an M2 phenotype, and, at present, their effect on NK cells is less clear. This study investigated whether tumor-associated macrophages (TAMs) have a role in altering NK cell function and phenotype using in vitro cocultures of murine NK cells with peritoneal or bone marrow-derived, M2-polarized macrophages or TAMs isolated from spontaneous mouse breast tumors. We report here that both peritoneal and bone marrow-derived M2 macrophages, as well as TAMs, substantially inhibit NK cell activation and concordant cytotoxicity against tumor cells. The mechanism for this inhibition was found to require contact between the respective cell types. Both M2 macrophages and TAMs are producers of the immunosuppressive cytokine TGF-beta. The inhibition of TGF-beta restored the cytotoxicity of NK cells in contact with M2 macrophages, implicating TGF-beta in the mechanism for NK cell inhibition. In addition to affecting NK cell function, TAMs also induced a CD27(low)CD11b(high)-exhausted NK cell phenotype, which corresponds with the reduced activation and cytotoxicity observed. This study reveals a novel implication of TAMs in the tumor-associated inhibition of NK cell function by demonstrating their capacity to directly alter NK cell cytotoxicity and phenotype in a contact-dependent mechanism involving TGF-beta. These findings identify the interaction between NK cells and TAMs as a prospective therapeutic target to enhance NK cell effector function for effective NK cell cancer therapies.