TNF-stimulated gene 6 (tsg6), encoding a 35-kDa secretory glycoprotein (TSG-6), is induced in fibroblasts, chondrocytes, synovial cells, and mononuclear cells by the proinflammatory cytokines TNF-alpha and IL-1, or by LPS. Large amounts of TSG-6 protein were found in synovial fluids of patients with rheumatoid arthritis. TSG-6 protein forms a stable complex with components of the serine protease inhibitor, inter-alpha-inhibitor (I alpha I). In this work, we show that TSG-6 potentiates the inhibitory effect of l alpha l on the protease activity of plasmin. The plasmin/plasminogen activator system is important in the protease network associated with inflammation. To test the hypothesis that through their cooperative inhibitory effect on plasmin TSG-6 and l alpha l can modulate the protease network and thus inhibit inflammation, we examined the effect of TSG-6 on experimentally induced inflammation. Human recombinant TSG-6 protein showed a potent anti-inflammatory activity in the murine air pouch model of carrageenan- or IL-1-induced acute inflammation. The inhibitory effect of locally administered TSG-6 on the IL-1-induced cellular infiltration was comparable with that of systemic dexamethasone treatment. Two mutant TSG-6 proteins with single amino acid substitutions close to the N terminus showed a complete or partial loss of anti-inflammatory activity. The anti-inflammatory effect of the TNF/IL-1-inducible TSG-6 protein, along with its ability to inhibit protease action through interaction with l alpha l, suggests that TSG-6 production during inflammation is part of a negative feedback loop operating through the protease network.