Myeloid differentiation factor 2 (MD-2) is a secreted gp that assembles with TLR4 to form a functional signaling receptor for bacterial LPS. In this study, we have identified a novel alternatively spliced isoform of human MD-2, termed MD-2 short (MD-2s), which lacks the region encoded by exon 2 of the MD-2 gene. Similar to MD-2, MD-2s is glycosylated and secreted. MD-2s also interacted with LPS and TLR4, but failed to mediate LPS-induced NF-kappaB activation and IL-8 production. We show that MD-2s is upregulated upon IFN-gamma, IL-6, and TLR4 stimulation and negatively regulates LPS-mediated TLR4 signaling. Furthermore, MD-2s competitively inhibited binding of MD-2 to TLR4. Our study pinpoints a mechanism that may be used to regulate TLR4 activation at the onset of signaling and identifies MD-2s as a potential therapeutic candidate to treat human diseases characterized by an overly exuberant or chronic immune response to LPS.