TLRs are pattern recognition transmembrane receptors that play key roles in innate immunity. A recently discovered soluble truncated form of TLR2 (sTLR2) acts as a decoy receptor, down-regulating the host inflammatory response to bacteria. To identify the presence and functional role of sTLR2 in modulating the intraamniotic inflammatory response to infection, we studied 109 amniotic fluid samples of women with normal pregnancy outcomes (n = 28) and women with (n = 39) and without (n = 42) intraamniotic infection. We sought to demonstrate a functional role of the amniotic fluid sTLR2 in modulating the TLR2 inflammatory signaling in vitro by using a villous explant system. Two sTLR2 forms were identified, and specificity was confirmed with neutralizing peptides. We showed that sTLR2 is present constitutively in amniotic fluid, its levels are gestational age dependent, and we determined that the sTLR2 quantity and functional engagement modulates the intensity of the intraamniotic inflammation elicited by Gram-positive bacteria. In vitro, we demonstrated that challenging placental villous explants with a specific TLR2 agonist (Pam3Cys) induced a significant cytokine response. Notably, preincubation of the preterm, but not near-term, amniotic fluid with Pam3Cys significantly inhibited the ability of this TLR2 agonist to elicit a cytokine reaction. Moreover, depletion of sTLR2 from preterm amniotic fluid removed its neutralizing property. Monensin significantly diminished sTLR2 immunoreactivity, indicating that sTLR2 is the result of intracellular posttranslational processing of TLR2. We conclude that sTLR2 is part of the amniotic fluid innate immune system and participates in regulating the inflammatory response to microbial pathogens.