FAT10 is a ubiquitin-like protein made of two tandem, head-to-tail, ubiquitin domains. It is known to covalently modify proteins in a mechanism similar, though not identical, to that of other ubiquitin-like proteins. The lack of known physiological substrates covalently conjugated by the protein made it difficult to unravel its biological functions. Here we identify two proteins that are covalently modified by FAT10, the inflammatory mediator LRRFIP2 and the endoplasmic reticulum membrane protein LULL1. LRRFIP2 is involved in NF-kappa B activation following stimulation of TLR4. It is recruited along with MYD88 to the cytosolic tail of the receptor, and by that mediates activation of the downstream signaling cascade. We show that FATylation of LRRFIP2 occurs on two distinct sites, each being modified by a single FAT10 moiety. Furthermore, the second modification is regulated by the first one. Importantly, FATylation of LRRFIP2 interferes with its recruitment to the membrane by translocating it to the cellular insoluble fraction, thus inhibiting NF-kappa B activation. (c) 2012 Elsevier Inc. All rights reserved.