The transmembrane protein CD83, expressed on APCs, B cells, and T cells, can be expressed as a soluble form generated by alternative splice variants and/or by shedding. Soluble CD83 (sCD83) was shown to be involved in negatively regulating the immune response. sCD83 inhibits T cell proliferation in vitro, supports allograft survival in vivo, prevents corneal transplant rejection, and attenuates the progression and severity of autoimmune diseases and experimental colitis. Although sCD83 binds to human PBMCs, the specific molecules that bind sCD83 have not been identified. In this article, we identify myeloid differentiation factor-2 (MD-2), the coreceptor within the TLR4/MD-2 receptor complex, as the high-affinity sCD83 binding partner. TLR4/MD-2 mediates proinflammatory signal delivery following recognition of bacterial LPSs. However, altering TLR4 signaling can attenuate the proinflammatory cascade, leading to LPS tolerance. Our data show that binding of sCD83 to MD-2 alters this signaling cascade by rapidly degrading IL-1R–associated kinase-1, leading to induction of the anti-inflammatory mediators IDO, IL-10, and PGE2 in a COX-2–dependent manner. sCD83 inhibited T cell proliferation, blocked IL-2 secretion, and rendered T cells unresponsive to further downstream differentiation signals mediated by IL-2. Therefore, we propose the tolerogenic mechanism of action of sCD83 to be dependent on initial interaction with APCs, altering early cytokine signal pathways and leading to T cell unresponsiveness.