LPS, a principal membrane component in Gram-negative bacteria, is recognized by a receptor complex consisting of TLR4 and MD-2. MD-2 is an extracellular molecule that is associated with the extracellular domain of TLR4 and has a critical role in LPS recognition. MD-2 directly interacts with LPS, and the region from Phe(119) to Lys(132) (Arg(132) in mice) has been shown to be important for interaction between LPS and TLR4/MD-2. With mouse MD-2 mutants, we show in this study that Gly(59) was found to be a novel critical amino acid for LPS binding outside the region 119-132. LPS signaling is thought to be triggered by ligand-induced TLR4 clustering, which is also regulated by MD-2. Little is known, however, about a region or an amino acid in the MD-2 molecule that regulates ligand-induced receptor clustering. MD-2 mutants substituting alanine for Phe(126) or Gly(129) impaired LPS-induced TLR4 clustering, but not LPS binding to TLR4/MD-2, demonstrating that ligand-induced receptor clustering is differentially regulated by MD-2 from ligand binding. We further show that dissociation of ligand-induced receptor clustering and of ligand-receptor interaction occurs in a manner dependent on TLR4 signaling and requires endosomal acidification. These results support a principal role for MD-2 in LPS recognition.