Traumatic injury or the pathogenesis of some neurological disorders is accompanied by inflammatory cellular mechanisms, mainly resulting from the activation of central nervous system (CNS) resident microglia. Under inflammatory conditions, microglia up-regulate the inducible isoform of NOS (iNOS), leading to the production of high concentrations of the radical molecule nitric oxide (NO). At the onset of inflammation, high levels of microglial-derived NO may serve as a cellular defense mechanism helping to clear the damaged tissue and combat infection of the CNS by invading pathogens. However, the excessive overproduction of NO by activated microglia has been suggested to govern the inflammation-mediated neuronal loss causing eventually complete neurodegeneration. Here, we investigated how NO influences phagocytosis of neuronal debris by BV-2 microglia, and how neurite outgrowth of human NT2 model neurons is affected by microglial-derived NO. The presence of NO greatly increased microglial phagocytic capacity in a model of acute inflammation comprising lipopolysaccharide (LPS)-activated microglia and apoptotic neurons. Chemical manipulations suggested that NO up-regulates phagocytosis independently of the sGC/cGMP pathway. Using a transwell system, we showed that reactive microglia inhibit neurite outgrowth of human neurons via the generation of large amounts of NO over effective distances in the millimeter range. Application of a NOS blocker prevented the LPS-induced NO production, totally reversed the inhibitory effect of microglia on neurite outgrowth, but reduced the engulfment of neuronal debris. Our results indicate that a rather simple notion of treating excessive inflammation in the CNS by NO synthesis blocking agents has to consider functionally antagonistic microglial cell responses during pharmaceutic therapy.