Much of the inflammatory response of the body to bloodborne Gram-negative bacteria occurs in the liver and spleen, the major organs that remove these bacteria and their lipopolysaccharide (LPS, endotoxin) from the bloodstream. We show here that LPS undergoes deacylation in the liver and spleen by acyloxyacyl hydrolase (AOAH), an endogenous lipase that selectively removes the secondary fatty acyl chains that are required for LPS recognition by its mammalian signaling receptor, MD-2-TLR4. We further show that Kupffer cells produce AOAH and are required for hepatic LPS deacylation in vivo. AOAH-deficient mice did not deacylate LPS and, whereas their inflammatory responses to low doses of LPS were similar to those of wild type mice for approximately 3 days after LPS challenge, they subsequently developed pronounced hepatosplenomegaly. Providing recombinant AOAH restored LPS deacylating ability to Aoah(-/-) mice and prevented LPS-induced hepatomegaly. AOAH-mediated deacylation is a previously unappreciated mechanism that prevents prolonged inflammatory reactions to Gram-negative bacteria and LPS in the liver and spleen.