Multiple genetic variants of CARD15/NOD2 have been associated with susceptibility to Crohn's disease and Blau syndrome. NOD2 recognizes muramyl dipeptide (MDP) derived from bacterial peptidoglycan (PGN), but the molecular basis of recognition remains elusive. We performed systematic mutational analysis to gain insights into the function of NOD2 and molecular mechanisms of disease susceptibility. Using an archive of 519 mutations covering approximately 50% of the amino-acid residues of NOD2, the essential regulatory domains and specific residues of NOD2 involved in recognition of MDP were identified. The analysis revealed distinct roles for N-terminal and C-terminal leucine-rich repeats (LRRs) in the modulation of NOD2 activation and bacterial recognition. Within the C-terminal LRRs, variable residues predicted to form the beta-strand/betaturn structure were found to be essential for the response to MDP. In addition, we analyzed NOD1, a NOD2-related protein, revealing conserved and nonconserved amino-acid residues involved in PGN recognition. These results provide new insights into the molecular function and regulation of NOD2 and related NOD family proteins.