Innate immune effector mechanisms triggered by oncolytic viruses may contribute to the clearance of both infected and uninfected tumor cells in immunocompetent murine hosts. Here, we developed an in vitro tumor cell/bone marrow coculture assay and used it to dissect innate immune sensor and effector responses to intratumoral vesicular stomatitis virus (VSV). We found that the type III IFN interleukin-28 (IL-28) was induced by viral activation of innate immune-sensing cells, acting as a key mediator of VSV-mediated virotherapy of B16ova melanomas. Using tumor variants which differentially express the IL-28 receptor, we showed that IL-28 induced by VSV within the tumor microenvironment sensitizes tumor cells to natural killer cell recognition and activation. These results revealed new insights into the immunovirological mechanisms associated with oncolytic virotherapy in immune-competent hosts. Moreover, they defined a new class of tumor-associated mutation, such as acquired loss of responsiveness to IL-28 signaling, which confers insensitivity to oncolytic virotherapy through a mechanism independent of viral replication in vitro. Lastly, the findings suggested new strategies to manipulate immune signals that may enhance viral replication, along with antitumor immune activation, and improve the efficacy of oncolytic virotherapies. Cancer Res; 70(11); 4539–49. ©2010 AACR.