miR-122 is a liver specific miRNA that plays an important role in controlling metabolic homeostasis in mammalian liver cells. Interestingly, miR-122 on exposure to lipotoxic stress is reduced in liver cells. To fight stress, miRNA processor Dicer1 is depleted to cause reduced miR-122 production and the lowering of miRNA level ensures a better stress response in hepatocytes under lipotoxic stress. Interestingly, lipid droplets, formed in the liver cells on exposure to high fat, ensure cytoplasmic phase separation of Ago2 and prevent interaction of Ago2 with Dicer1. Lipid droplets bind miRNA and enhance miRNA-Ago2 uncoupling and Ago2 phase separation. Loss of interaction between Ago2 and Dicer1 eventually facilitates export and lowering of cellular Dicer1, a process also dependent on the endosomal maturation controller protein Alix, thereby ceasing pre-miRNA processing by Dicer1 in lipid exposed cells. Depletion of lipid droplets by downregulation of Perilipins with siRNAs resulted in a rescue of cellular Dicer1 level and Ago2-Dicer1 interaction. This is a novel mechanism that liver cells adopt to restrict cellular miRNA levels under stress condition. Thus, lipid droplets prevent cell death upon exposure to high fat by reducing intra and extracellular pool of miR-122 in hepatic tissue.