Peptidoglycan recognition proteins (PGRPs) are structurally conserved from insects to mammals. Insect PGRPs have diverse host-defense functions. Mammalian PGRPs PGLYRP-1, PGLYRP-3, and PGLYRP-4 have bactericidal activity, while PGLYRP-2 has amidase activity. To extend the known functions of mammalian PGRPs, we examined whether they have immunomodulating activities in peptidoglycan-induced arthritis in mice. We demonstrate that PGLYRP-2 and Nod2 are both required for arthritis in this model. The sequence of events in peptidoglycan-induced arthritis is activation of Nod2, local expression of PGLYRP-2, chemokine production, and recruitment of neutrophils into the limbs, which induces acute arthritis. Only PGLYRP-2 among the four mammalian PGRPs displays this proinflammatory function, and PGLYRP-1 is anti-inflammatory. Toll-like receptor 4 (TLR4) and MyD88 are required for maturation of neutrophils before peptidoglycan challenge. Our results demonstrate that PGRPs, Nod2, and TLR4, representing three different types of pattern-recognition molecules, play interdependent in vivo roles in local inflammation.