Balanced activity of pro- and anti-inflammatory cytokines during innate immune responses is required to allow effective host defense while avoiding tissue damage and autoimmunity. Induction of cytokine production after recognition of pathogen-associated molecular patterns (PAMPs) by innate immune cells has been well demonstrated, but modulation of cytokine function by PAMPs is not well understood. In this study we show that stimulation of macrophages with zymosan, which contains PAMPs derived from yeast, rapidly extinguished macrophage responses to IL-10, a suppressive cytokine that limits inflammatory tissue damage but also compromises host defense. The mechanism of inhibition involved protein kinase Cbeta and internalization of IL-10R, and was independent of TLR2 and phagocytosis. Inhibition of IL-10 signaling and function required direct contact with zymosan, and cells in an inflammatory environment that had not contacted zymosan remained responsive to the paracrine activity of zymosan-induced IL-10. These results reveal a mechanism that regulates IL-10 function such that antimicrobial functions of infected macrophages are not suppressed, but the activation of surrounding noninfected cells and subsequent tissue damage are limited. The fate of individual cells in an inflammatory microenvironment is thus specified by dynamic interactions among host cells, microbes, and cytokines that determine the balance between protection and pathology.