Murine lymphokine-activated-killer cell activity was readily induced by culturing spleen cells with 10 U/ml of interleukin-2 for 4 days. In contrast, very little activity was generated under the same culture conditions when nonparenchymal liver cells were used as the responding cells. It was concluded that Kupffer cells produced prostaglandin and interferon α/β, which suppressed lymphokine-activated-killer induction because (a) induction of lymphokine-activated-killer activity from nonparenchymal liver cells was observed in the presence of indomethacin and anti-interferon α/β antibody; (b) when adherent nonparenchymal liver cells, primarily Kupffer cells, were removed, lymphokine-activated-killer activity could be obtained with interleukin-2 alone; (c) coculture of Kupffer cells with nonadherent nonparenchymal liver cells in a two-chambered system inhibited lymphokineactivated killer cell induction in a dose-dependent manner; (d) exogenous prostaglandin E2 and interferon α/β added at the start of culture inhibited interleukin-2—induced cytotoxicity and proliferation, whereas the other major prostaglandin species in the liver, prostaglandin D2, had little effect. These findings are distinctive with Kupffer cells because splenic macrophages did not exert such inhibition in parallel experiments. Moreover, the supernatant collected from the 24-hr culture of nonparenchymal liver cells contained greater than 20-fold more prostaglandin E2 and interferon α/β than that from culture of spleen cells. In subsequent in vivo experiments, when interleukin-2 was given intraperitoneally to mice, the combination of indomethacin and anti-interferon α/β antibody significantly enhanced lymphokine-activated-killer activity recovered from the liver. Besides Kupffer cells, it was found that hepatocytes, the major cellular component of the liver, also played an inhibitory role on lymphokine-activated-killer cell generation. A cell-free liver cytosolic extract had even more potent suppressive effect, which was partially reversed by supplementation of arginine, indicating that arginase may be one of the hepatocyte-derived immunoinhibitors. (HEPATOLOGY 1990;12:644–652).