The bactericidal/permeability-increasing protein (BPI) of polymorphonuclear leukocytes (PMN) is a potent cytotoxin, specific for Gram-negative bacteria, that also inhibits endotoxin activity by neutralizing isolated bacterial lipopolysaccharides (LPS). We have previously shown that an isolated 25 kD N-terminal fragment of human BPI carries all the antibacterial activities of the parent 55-60 kD molecule. In this study we have compared the LPS-neutralizing activities of human holo-BPI, the N-terminal fragment and a 30 kD C-terminal fragment that we have now isolated. We show that the N-terminal fragment also has LPS-neutralizing activity as detected by inhibition (up to 95%) of (a) activation by LPS of procoagulant proteases in Limulus amebocyte lysates, (b) LPS "priming" of PMN, and (c) LPS-mediated production of tumor necrosis factor in whole human blood. Holo-BPI and the 25 kD fragment have similar neutralizing potency (in nanomolar range) in all assays toward "smooth" LPS from Escherichia coli O111:B4 and O55:B5 (possessing long chain polysaccharide or O-antigen), and "deep rough" LPS from Salmonella minnesota Re595 mutant (possessing no O-antigen). The C-terminal fragment of BPI is devoid of antibacterial activity when tested against BPI-sensitive E. coli J5, but does have endotoxin-neutralizing activity. This activity is weak relative to holo-BPI and the 25 kD N-terminal fragment in the Limulus and PMN-priming assay, but is comparable for inhibition of TNF production in whole blood. We conclude that the principal determinants for LPS recognition and neutralization, like those for antibacterial action, reside in the N-terminal half of the BPI molecule, but that sites within the C-terminal half can also contribute to BPI-LPS interaction once LPS is detached from the bacterial envelope.