Pigment epithelium‐derived factor (PEDF) is a potent angiogenic inhibitor. Reduced PEDF levels are associated with diabetic retinopathy. However, the mechanism for the protective effects of PEDF against diabetic retinopathy (DR) is presently unclear. As inflammation plays a role in DR, the present study determined the effect of PEDF on inflammation. Western blot analysis and ELISA demonstrated that retinal and plasma PEDF levels were drastically decreased in rats with endotoxin‐induced uveitis (EIU), which suggests that PEDF is a negative acute‐phase protein. Intravitreal injection of PEDF significantly reduced vascular hyper‐permeability in rat models of diabetes and oxygen‐induced retinopathy, correlating with the decreased levels of retinal inflammatory factors, including VEGF, VEGF receptor‐2, MCP‐1, TNF‐α, and ICAM‐1. In cultured retinal capillary endothelial cells, PEDF significantly decreased TNF‐α and ICAM‐1 expression under hypoxia. Moreover, down‐regulation of PEDF expression by siRNA resulted in significantly increases of VEGF and TNF‐α secretion in retinal Müller cells. These findings suggest that PEDF is a novel endogenous anti‐inflammatory factor in the eye. The decrease of ocular PEDF levels may contribute to inflammation and vascular leakage in DR.