TNF alpha-stimulated gene-6 (TSG6), a 30-kDa protein generated by activated macrophages, modulates inflammation; however, its mechanism of action and role in the activation of macrophages are not fully understood. Herewe observed markedly augmented LPS-induced inflammatory lung injury and mortality in TSG6(-/-) mice compared with WT (TSG6(+/+)) mice. Treatment of mice with intratracheal instillation of TSG6 prevented LPS-induced lung injury and neutrophil sequestration, and increased survival in mice. We found that TSG6 inhibited the association of TLR4 with MyD88, thereby suppressing NF-kappa B activation. TSG6 also prevented the expression of proinflammatory proteins (iNOS, IL-6, TNF alpha, IL-1 beta, and CXCL1) while increasing the expression of anti-inflammatory proteins (CD206, Chi3l3, IL-4, and IL-10) in macrophages. This shift was associated with suppressed activation of proinflammatory transcription factors STAT1 and STAT3. In addition, we observed that LPS itself up-regulated the expression of TSG6 in TSG6(+/+) mice, suggesting an autocrine role for TSG6 in transitioning macrophages. Thus, TSG6 functions by converting macrophages from a proinflammatory to an anti-inflammatory phenotype secondary to suppression of TLR4/NF-kappa B signaling and STAT1 and STAT3 activation.