Lipopolysaccharide (LPS) induces expression of tumor necrosis factor alpha (TNFalpha) and other pro-inflammatory cytokines in macrophages. Following its induction, TNFalpha gene transcription is rapidly attenuated, in part due to the accumulation of NF-kappaB p50 homodimers that bind to three kappaB sites in the TNFalpha promoter. Here we have investigated the inhibitory role of BCL-3, an IkappaB-like protein that interacts exclusively with p50 and p52 homodimers. BCL-3 was induced by LPS with delayed kinetics and was associated with p50 in the nucleus. Forced expression of BCL-3 suppressed LPS-induced transcription from the TNFalpha promoter and inhibited two artificial promoters composed of TNFalphakappaB sites that preferentially bind p50 dimers. BCL-3-mediated repression was reversed by trichostatin A and was enhanced by overexpression of HDAC-1, indicating that transcriptional attenuation involves recruitment of histone deacetylase. Analysis of macrophages from p50 and BCL-3 knock-out mice revealed that both transcription factors negatively regulate TNFalpha expression and that BCL-3 inhibits IL-1alpha and IL-1beta. In contrast, induction of the anti-inflammatory cytokine IL-10 was reduced in BCL-3 null macrophages. BCL-3 was not required for the production of p50 homodimers but BCL-3 expression was severely diminished in p50-deficient cells. Together, these findings indicate that p50 and BCL-3 function as anti-inflammatory regulators in macrophages by attenuating transcription of pro-inflammatory cytokines and activating IL-10 expression.