Nucleotide binding and oligomerization domain-containing protein 2 (NOD2/Card15) is an intracellular protein that is involved in the recognition of bacterial cell wall-derived muramyl dipeptide. Mutations in the gene encoding NOD2 are associated with inherited inflammatory disorders, including Crohn disease and Blau syndrome. NOD2 is a member of the nucleotide-binding domain and leucine-rich repeat-containing protein gene (NLR) family. Nucleotide binding is thought to play a critical role in signaling by NLR family members. However, the molecular mechanisms underlying signal transduction by these proteins remain largely unknown. Mutations in the nucleotide-binding domain of NOD2 have been shown to alter its signal transduction properties in response to muramyl dipeptide in cellular assays. Using purified recombinant protein, we now demonstrate that NOD2 binds and hydrolyzes ATP. Additionally, we have found that the purified recombinant protein is able to bind directly to muramyl dipeptide and can associate with known NOD2-interacting proteins in vitro. Binding of NOD2 to muramyl dipeptide and homo-oligomerization of NOD2 are enhanced by ATP binding, suggesting a model of the molecular mechanism for signal transduction that involves binding of nucleotide followed by binding of muramyl dipeptide and oligomerization of NOD2 into a signaling complex. These findings set the stage for further studies into the molecular mechanisms that underlie detection of muramyl dipeptide and assembly of NOD2-containing signaling complexes.