Patients with the genomic instability syndrome Fanconi anemia (FA) commonly develop progressive bone marrow (BM) failure and have a high risk of cancer. Certain manifestations of the disease suggest that the FA immune system is dysfunctional and may contribute to the pathogenesis of both BM failure and malignancies. In this study, we have investigated inflammation and innate immunity in FA hemopoietic cells using mice deficient in Fanconi complementation group C gene (Fancc). We demonstrate that Fancc-deficient mice exhibit enhanced inflammatory response and are hypersensitive to LPS-induced septic shock as a result of hemopoietic suppression. This exacerbated inflammatory phenotype is intrinsic to the hemopoietic system and can be corrected by the re-expression of a wild-type FANCC gene, suggesting a potential role of the FANCC protein in innate immunity. LPS-mediated hemopoietic suppression requires two major inflammatory agents, TNF-alpha and reactive oxygen species. In addition, LPS-induced excessive accumulation of reactive oxygen species in Fancc(-/-) BM cells overactivates the stress kinase p38 and requires prolonged activation of the JNK. Our data implicate a role of inflammation in pathogenesis of FA and BM failure diseases in general.