Abstract Acute Myeloid Leukemia, a hematological malignancy with poor clinical outcome, is composed of hierarchically heterogeneous cells. We examine the contribution of this heterogeneity to disease progression in the context of anti-tumor immune responses and investigate whether these responses regulate the balance between stemness and differentiation in AML. Combining phenotypic analysis with proliferation dynamics and fate-mapping of AML cells in a murine AML model, we demonstrate the presence of a terminally differentiated, chemoresistant population expressing high levels of PDL1. We show that PDL1 upregulation in AML cells, following exposure to IFNγ from activated T cells, is coupled with AML differentiation and the dynamic balance between proliferation, versus differentiation and immunosuppression, facilitates disease progression in the presence of immune responses. This microenvironment-responsive hierarchical heterogeneity in AML may be key in facilitating disease growth at the population level at multiple stages of disease, including following bone marrow transplantation and immunotherapy.