BACKGROUND & AIMS:: Non-alcoholic steatohepatitis (NASH) is characterized by hepatic steatosis with inflammation. Although steatosis is benign and reversible, inflammation can increase liver damage. Hepatic inflammation has been associated with accumulation of cholesterol in lysosomes of Kupffer cells. 27-hydroxycholesterol (27HC), a derivative of cholesterol formed by CYP27A1, can mobilize cholesterol from the lysosomes to the cytoplasm. We investigated whether 27HC can change the intracellular distribution cholesterol and reduce hepatic inflammation in mice. METHODS:: We transplanted bone marrow from irradiated wild-type or Cyp27a1-/-mice to mice that do not express the low density lipoprotein receptor ( Ldlr-/-), which are hyperlipidemic; 9 weeks later, mice were fed either regular chow or a high-fat, high-cholesterol (HFC) diet for 3 months. In a separate experiment, Ldlr-/- mice were given subcutaneous injections of 27HC and placed on regular chow or HFC diets for 3 weeks. Blood and liver tissues samples were collected and analyzed for intracellular cholesterol distribution and inflammation. RESULTS:: In Ldlr-/-mice that received bone marrow transplants from Cyp27a1-/-mice, lysosomes of Kupfer cells had a greater accumulation of cholesterol than those of mice that received bone marrow from wild-type mice, after the HFC diet. Liver histology and gene expression analyses showed increased inflammation and liver damage in mice given bone marrow transplants from Cyp27a1-/-mice and placed on the HFC diet. Administration of 27HC to Ldlr-/-mice, following the HFC diet, reduced the accumulation of lysosomal cholesterol and hepatic inflammation, compared with mice that were not given 27HC. CONCLUSIONS:: Accumulation of cholesterol in lysosomes of Kupfer cells promotes hepatic inflammation in mice. The cholesterol derivative 27HC reduces accumulation of cholesterol in lysosomes and might be used to treat NASH.