<jats:p><jats:bold>Background and purpose: </jats:bold> Obovatol isolated from the medicinal herb <jats:italic>Magnolia obovata</jats:italic> exhibits a variety of biological activities. Here, the effect of obovatol and its mechanism of action on microglial activation, neuroinflammation and neurodegeneration were investigated.<jats:p><jats:bold>Experimental approach: </jats:bold> In microglial BV‐2 cells stimulated with lipopolysaccharide (LPS), we measured nitric oxide (NO) and cytokine production, and activation of intracellular signalling pathways by reverse transcription‐polymerase chain reaction and Western blots. Cell death was assayed in co‐cultures of activated microglia (with bacterial LPS) and neurons and in LPS‐induced neuroinflammation in mice <jats:italic>in vivo.</jats:italic><jats:p><jats:bold>Key results: </jats:bold> Obovatol inhibited microglial NO production with an IC<jats:sub>50</jats:sub> value of 10 µM. Obovatol also inhibited microglial expression of proinflammatory cytokines and inducible nitric‐oxide synthase, which was accompanied by the inhibition of multiple signalling pathways such as nuclear factor kappa B, signal transducers and activators of transcription 1, and mitogen‐activated protein kinases. In addition, obovatol protected cultured neurons from microglial toxicity and inhibited neuroinflammation in mice <jats:italic>in vivo.</jats:italic> One molecular target of obovatol in microglia was peroxiredoxin 2 (Prx2), identified by affinity chromatography and mass spectrometry. Obovatol enhanced the reactive oxygen species (ROS)‐scavenging activity of Prx2 <jats:italic>in vitro</jats:italic>, thereby suppressing proinflammatory signalling pathways of microglia where ROS plays an important role.<jats:p><jats:bold>Conclusions and implications: </jats:bold> Obovatol is not only a useful chemical tool that can be used to investigate microglial signalling, but also a promising drug candidate against neuroinflammatory diseases. Furthermore, our results indicate that Prx2 is a novel drug target that can be exploited for the therapeutic modulation of neuroinflammatory signalling.