Viral signaling through retinoic acid-inducible gene-I (RIG-I) and its adaptor protein, IFN promoter-stimulator 1 (IPS-1), activates IFN regulatory factor-3 (IRF-3) and the host IFN-α/β response that limits virus infection. The hepatitis C virus (HCV) NS3/4A protease cleaves IPS-1 to block RIG-I signaling, but how this regulation controls the host response to HCV is not known. Moreover, endogenous IPS-1 cleavage has not been demonstrated in the context of HCV infection in vitro or in vivo. Here, we show that HCV infection transiently induces RIG-I- and IPS-1-dependent IRF-3 activation. This host response limits HCV production and constrains cellular permissiveness to infection. However, HCV disrupts this response early in infection by NS3/4A cleavage of IPS-1 at C508, releasing IPS-1 from the mitochondrial membrane. Cleavage results in subcellular redistribution of IPS-1 and loss of interaction with RIG-I, thereby preventing downstream activation of IRF-3 and IFN-β induction. Liver tissues from chronically infected patients similarly demonstrate subcellular redistribution of IPS-1 in infected hepatocytes and IPS-1 cleavage associated with a lack of ISG15 expression and conjugation of target proteins in vivo. Importantly, small-molecule inhibitors of NS3/4A prevent cleavage and restore RIG-I signaling of IFN-β induction. Our results suggest a dynamic model in which early activation of IRF-3 and induction of antiviral genes are reversed by IPS-1 proteolysis and abrogation of RIG-I signaling as NS3/4A accumulates in newly infected cells. HCV protease inhibitors effectively prevent IPS-1 proteolysis, suggesting they may be capable of restoring this innate host response in clinical practice.