Mutations in the sister of P-glycoprotein (Spgp) or bile salt export pump (BSEP) are associated with Progressive Familial Intrahepatic Cholestasis (PFIC2). Spgp is predominantly expressed in the canalicular membranes of liver. Consistent with in vitro evidence demonstrating the involvement of Spgp in bile salt transport, PFIC2 patients secrete less than 1% of biliary bile salts compared with normal infants. The disease rapidly progresses to hepatic failure requiring liver transplantation before adolescence. In this study, we show that the knockout of spgp gene in mice results in intrahepatic cholestasis, but with significantly less severity than PFIC2 in humans. Some unexpected characteristics are observed. Notably, although the secretion of cholic acid in mutant mice is greatly reduced (6% of wild-type), total bile salt output in mutant mice is about 30% of wild-type. Also, secretion of an unexpectedly large amount of tetra-hydroxylated bile acids (not detected in wild-type) is observed. These results suggest that hydroxylation and an alternative canalicular transport mechanism for bile acids compensate for the absence of Spgp function and protect the mutant mice from severe cholestatic damage. In addition, the spgp^−/− mice display a significant increase in the secretion of cholesterol and phospholipids into the bile. This latter observation in spgp^−/− mice suggests that intrahepatic, rather than intracanalicular, bile salts are the major driving force for the biliary lipid secretion. The spgp^−/− mice thus provide a unique model for gaining new insights into therapeutic intervention for intrahepatic cholestasis and understanding mechanisms associated with lipid homeostasis.