Type I interferon (IFN-α/β) represents the key element of the antiviral defense mechanisms against most viruses, however, rotaviruses that infect the gut epithelium, display little sensitivity to type I IFN. Here, we report that the intestinal epithelium is a unique cell compartment in the organism that does not depend on type I IFN in antiviral defenses. Type I IFN was unable to induce antiviral gene expression in intestinal epithelial cells (IEC) that correlated well with low epithelial expression of both chains of the IFN-α/β receptor complex. In stark contrast, IECs strongly responded to IFN-λ on baseline, upon IFN treatment and virus challenge. Commensal microflora was found to establish baseline IFN-λ signaling in IECs and enhance resistance to enteric virus infection. In adult mice lacking functional receptors for IFN-λ, human reovirus selectively replicated in IECs. By contrast, these cells remained virus-free in IFN-α/β-deficient mice that developed deadly systemic disease after oral reovirus infection. In suckling mice with IFN-λ receptor deficiency, reovirus not only replicated in the gut epithelium but also infected epithelial cells lining the bile ducts, thereby inducing a fatal liver disease. Interestingly, in response to synthetic double-stranded RNA or enteric virus infection, gut epithelial cells readily produced IFN-λ but not IFN-α or IFN-β. Taken together, it appears that the intestinal epithelium has evolved mechanisms to specifically produce and respond to IFN-λ, whereas systemic antiviral defenses depend on IFN-α/β produced predominantly by lymphoid cells. Our data suggest that such strict separation of the two IFN systems has evolved to avoid unnecessarily frequent triggering of the IFN-α/β system by commensals, which would activate systemic IFN pathways and thereby induce exacerbated inflammation.