Apolipoprotein E plays an important role in recovery from acute brain injury and risk of developing Alzheimer's disease. We demonstrate that biologically relevant concentrations of apoE suppress microglial activation and release of TNFalpha and NO in a dose-dependent fashion. Peptides derived from the apoE receptor-binding region mimic the effects of the intact protein, whereas deletion of apoE residues 146-149 abolishes peptide bioactivity. These results are consistent with the hypothesis that apoE modulates microglial function by binding specific cell surface receptors and that the immunomodulatory effects of apoE in the central nervous system may account for its role in acute and chronic neurological disease.