Kupffer cells, resident tissue macrophages of the liver, play a key role in the regulation of hepatic inflammation, hepatocyte death, and fibrosis that characterize liver diseases. However, it is controversial whether Kupffer cells promote or protect from liver injury. To explore this issue we examined the role of Kupffer cells in liver injury, cell death, regeneration, and fibrosis on cholestatic liver injury in C57BL/6 mice using a model of partial bile duct ligation (BDL), in which animals do not die and the effects of BDL can be compared between injured ligated lobes and nonligated lobes. In cholestatic liver injury, the remaining viable cells represented tolerance for tumor necrosis factor alpha (TNF‐α)‐induced hepatocyte apoptosis and regenerative features along with AKT activation. Inhibition of AKT by adenovirus expressing dominant‐negative AKT abolished the survival and regenerative properties in hepatocytes. Moreover, Kupffer cell depletion by alendronate liposomes increased hepatocyte damage and the sensitivity of TNF‐α‐induced hepatocyte apoptosis in ligated lobes. Kupffer cell depletion decreased hepatocyte regeneration and liver fibrosis with reduced AKT activation. To investigate the impact of acid sphingomyelinase (ASMase) in Kupffer cells, we generated chimeric mice that contained ASMase‐deficient Kupffer cells and ‐sufficient hepatocytes using a combination of Kupffer cell depletion, irradiation, and the transplantation of ASMase‐deficient bone marrow cells. In these mice, AKT activation, the tolerance for TNF‐α‐induced apoptosis, and the regenerative responses were attenuated in hepatocytes after BDL. Conclusion: Kupffer cells have a protective role for hepatocyte damage and promote cell survival, liver regeneration, and fibrosis in cholestatic liver disease. Kupffer cell‐derived ASMase is crucial for AKT activation of hepatocytes that is required for the survival and regenerative responses. (HEPATOLOGY 2009.)