Eukaryotic peptidoglycan recognition proteins (PGRPs) are related to bacterial amidases. In Drosophila, PGRPs bind peptidoglycan and function as central sensors and regulators of the innate immune response. PGRP-LC/PGRP-LE constitute the receptor complex in the immune deficiency (IMD) pathway, which is an innate immune cascade triggered upon Gram-negative bacterial infection. Here, we present the functional analysis of the nonamidase, membrane-associated PGRP-LF. We show that PGRP-LF acts as a specific negative regulator of the IMD pathway. Reduction of PGRP-LF levels, in the absence of infection, is sufficient to trigger IMD pathway activation. Furthermore, normal development is impaired in the absence of functional PGRP-LF, a phenotype mediated by the JNK pathway. Thus, PGRP-LF prevents constitutive activation of both the JNK and the IMD pathways. We propose a model in which PGRP-LF keeps the Drosophila IMD pathway silent by sequestering circulating peptidoglycan.