NFAT5 (nuclear factor of activated T cells), a well‐known osmoprotective factor, can be activated by isotonic stimuli such as Toll‐like receptor (TLR) triggering. However, it is unclear how NFAT5 discriminates between isotonic and hypertonic stimuli to produce different functional and molecular outcomes. Here, we identified a novel XO–ROS–p38 MAPK–NFAT5 pathway (XO is xanthine oxidase, ROS is reactive oxygen species) that is activated in RAW 264.7 macrophages upon isotonic TLR stimulation. Unlike what is seen under hypertonic conditions, XO‐derived ROS were selectively required for the TLR‐induced NFAT5 activation and NFAT5 binding to the IL‐6 promoter in RAW 264.7 macrophages under isotonic conditions. In mouse peritoneal macrophages and human macrophages, TLR ligation also induced NFAT5 activation, which was dependent on XO and p38 kinase. The involvement of XO in NFAT5 activation by TLR was confirmed in RAW 264.7 macrophages implanted in BALB/c mice. Moreover, allopurinol, an XO inhibitor, suppressed arthritis severity and decreased the expression of NFAT5 and IL‐6 in splenic macrophages in C57BL/6 mice. Collectively, these data support a novel function of the XO–NFAT5 axis in macrophage activation and TLR‐induced arthritis, and suggest that XO inhibitor(s) could serve as a therapeutic agent for chronic inflammatory arthritis.