The activation of innate immune cells triggers numerous intracellular signaling pathways, which require tight control to mount an adequate immune response. The PI3K signaling pathway is intricately involved in innate immunity, and its activation dampens the expression and release of proinflammatory cytokines in myeloid cells. These signaling processes are strictly regulated by the PI3K antagonist, the lipid phosphatase, PTEN, a known tumor suppressor. Importantly, PTEN is responsible for the elevated production of cytokines such as IL-6 in response to TLR agonists, and deletion of PTEN results in diminished inflammatory responses. However, the mechanisms by which PI3K negatively regulates TLR signaling are only partially resolved. We observed that Arginase I expression and secretion were markedly induced by PTEN deletion, suggesting PTEN−/− macrophages were alternatively activated. This was mediated by increased expression and activation of the transcription factors C/EBPβ and STAT3. Genetic and pharmacologic experimental approaches in vitro, as well as in vivo autoimmunity models, provide convincing evidence that PI3K/PTEN-regulated extracellular Arginase I acts as a paracrine regulator of inflammation and immunity.