The internalization of Borrelia burgdorferi, the causative agent of Lyme disease, by phagocytes is essential for an effective activation of the immune response to this pathogen. The intracellular, cytosolic receptor Nod2 has been shown to play varying roles in either enhancing or attenuating inflammation in response to different infectious agents. We examined the role of Nod2 in responses to B. burgdorferi. In vitro stimulation of Nod2 deficient bone marrow derived macrophages (BMDM) resulted in decreased induction of multiple cytokines, interferons and interferon regulated genes compared with wild-type cells. However, B. burgdorferi infection of Nod2 deficient mice resulted in increased rather than decreased arthritis and carditis compared to control mice. We explored multiple potential mechanisms for the paradoxical response in in vivo versus in vitro systems and found that prolonged stimulation with a Nod2 ligand, muramyl dipeptide (MDP), resulted in tolerance to stimulation by B. burgdorferi. This tolerance was lost with stimulation of Nod2 deficient cells that cannot respond to MDP. Cytokine patterns in the tolerance model closely paralleled cytokine profiles in infected Nod2 deficient mice. We propose a model where Nod2 has an enhancing role in activating inflammation in early infection, but moderates inflammation after prolonged exposure to the organism through induction of tolerance.