The saturated fatty acids acylated on Lipid A of lipopolysaccharide (LPS) or bacterial lipoproteins play critical roles in ligand recognition and receptor activation for Toll-like Receptor 4 (TLR4) and TLR2. The results from our previous studies demonstrated that saturated and polyunsaturated fatty acids reciprocally modulate the activation of TLR4. However, the underlying mechanism has not been understood. Here, we report for the first time that the saturated fatty acid lauric acid induced dimerization and recruitment of TLR4 into lipid rafts, however, dimerization was not observed in non-lipid raft fractions. Similarly, LPS and lauric acid enhanced the association of TLR4 with MD-2 and downstream adaptor molecules, TRIF and MyD88, into lipid rafts leading to the activation of downstream signaling pathways and target gene expression. However, docosahexaenoic acid (DHA), an n-3 polyunsaturated fatty acid, inhibited LPS- or lauric acid-induced dimerization and recruitment of TLR4 into lipid raft fractions. Together, these results demonstrate that lauric acid and DHA reciprocally modulate TLR4 activation by regulation of the dimerization and recruitment of TLR4 into lipid rafts. In addition, we showed that TLR4 recruitment to lipid rafts and dimerization were coupled events mediated at least in part by NADPH oxidase-dependent reactive oxygen species generation. These results provide a new insight in understanding the mechanism by which fatty acids differentially modulate TLR4-mediated signaling pathway and consequent inflammatory responses which are implicated in the development and progression of many chronic diseases.