Carbon monoxide (CO) suppresses proinflammatory responses in macrophages reacting to LPS. We hypothesize that CO acts by inducing a molecule(s) that suppresses the inflammatory response to subsequent stress. Exposure of macrophages to CO alone in vitro produced a brief burst of mitochondrial-derived ROS, which led to expression of PPARγ. PPARγ expression proved essential for mediating the anti-inflammatory effects of CO. Blocking the CO-mediated increase in ROS generation prevented PPARγ induction, and blocking PPARγ prevented CO's anti-inflammatory effects. In a model of acute lung injury in mice, CO blocked expression of Egr-1, a central mediator of inflammation, and decreased tissue damage; inhibition of PPARγ abrogated both effects. These data identify the mitochondrial oxidases as an (perhaps the) initial cellular target of CO and demonstrate that CO upregulates expression of PPARγ via the mitochondria, which assures that a subsequent stress stimulus will lead to a cytoprotective as opposed to a proinflammatory phenotype.