Regulation of inflammation in the CNS is essential to prevent irreversible cellular damage that can occur in neurodegenerative diseases such as multiple sclerosis (MS). We investigated the role of interleukin-4 (IL-4) in regulating CNS inflammation using the animal model of MS, experimental autoimmune encephalomyelitis (EAE). We found that CNS-derived IL-4 was a critical regulator because mice with a deficiency in IL-4 production in the CNS, but not the periphery, had exacerbated EAE associated with a significant increase in the absolute number of infiltrating inflammatory cells. We also found that CNS-resident microglial cells in both the resting and activated state produced the protein Ym1, which is a marker of alternatively activated macrophages (aaMΦs), in an IL-4-dependent manner. This aaMΦ phenotype extended to the lack of nitric oxide (NO) production by activated microglial cells, which is a marker of classically activated macrophages. We also show that IL-4 induced the expression of Ym1 in peripheral infiltrating macrophages, which also produce NO. Thus, macrophages that migrate into the CNS exhibit a dual phenotype. These data indicate that IL-4 production in the CNS is essential for controlling autoimmune inflammation by inducing a microglial cell aaMΦ phenotype. Macrophages that have undergone alternative activation have been shown to be important in tissue repair; thus, our results suggest a new role for microglial cells in the regulation of inflammation in the CNS.