Fatty acid beta-oxidation occurs in both mitochondria and peroxisomes. Long chain fatty acids are also metabolized by the cytochrome P450 CYP4A omega-oxidation enzymes to toxic dicarboxylic acids (DCAs) that serve as substrates for peroxisomal beta-oxidation. Synthetic peroxisome proliferators interact with peroxisome proliferator activated receptor alpha (PPARalpha) to transcriptionally activate genes that participate in peroxisomal, microsomal, and mitochondrial fatty acid oxidation. Mice lacking PPARalpha (PPARalpha-/-) fail to respond to the inductive effects of peroxisome proliferators, whereas those lacking fatty acyl-CoA oxidase (AOX-/-), the first enzyme of the peroxisomal beta-oxidation system, exhibit extensive microvesicular steatohepatitis, leading to hepatocellular regeneration and massive peroxisome proliferation, implying sustained activation of PPARalpha by natural ligands. We now report that mice nullizygous for both PPARalpha and AOX (PPARalpha-/- AOX-/-) failed to exhibit spontaneous peroxisome proliferation and induction of PPARalpha-regulated genes by biological ligands unmetabolized in the absence of AOX. In AOX-/- mice, the hyperactivity of PPARalpha enhances the severity of steatosis by inducing CYP4A family proteins that generate DCAs and since they are not metabolized in the absence of peroxisomal beta-oxidation, they damage mitochondria leading to steatosis. Blunting of microvesicular steatosis, which is restricted to few liver cells in periportal regions in PPARalpha-/- AOX-/- mice, suggests a role for PPARalpha-induced genes, especially members of CYP4A family, in determining the severity of steatosis in livers with defective peroxisomal beta-oxidation. In age-matched PPARalpha-/- mice, a decrease in constitutive mitochondrial beta-oxidation with intact constitutive peroxisomal beta-oxidation system contributes to large droplet fatty change that is restricted to centrilobular hepatocytes. These data define a critical role for both PPARalpha and AOX in hepatic lipid metabolism and in the pathogenesis of specific fatty liver phenotype.