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Acute-on-chronic liver failure (ACLF) is a life-threatening condition characterized by acute hepatic decompensation, multi-organ failure, and high short-term mortality in patients with liver cirrhosis. A hallmark of ACLF is profound deterioration of the immune system, which contributes to organ-specific excessive inflammation and immune dysfunction, predisposing patients to infection and multi-organ failure. This review aims to elucidate the cellular and molecular mechanisms underlying systemic immune dysfunction in ACLF, highlighting key pathophysiological pathways and their clinical significance. We provide an overview of ACLF including its global prevalence and clinical significance, against the background of the underlying immune dysfunction in its pathogenesis. The discussion focuses on innate immune alterations, such as impaired neutrophil and monocyte phagocytosis, excessive neutrophil extracellular trap (NET) formation, and monocyte/macrophage dysfunction contributing to immuneparesis and exaggerated inflammation, respectively, which evolve in an organ-specific manner. Dysregulation of natural killer (NK) cell cytotoxicity and adaptive immune dysfunction, including changes in T cell subpopulations and B cell antibody production in ACLF, are discussed. We further dissect the emerging evidence of molecular pathways driving dysfunction of immune cells and their impaired ability to control infections in ACLF, emphasizing the roles of pathogen- and damage-associated molecular patterns (PAMPs/DAMPs), toll-like receptor (TLR) signaling, oxidative stress, mitochondrial dysfunction, epigenetic/metabolic reprogramming and immune checkpoint molecules. The review expands on immune cell communication within the immune system (innate and adaptive), with other non-parenchymal and parenchymal cells and at the inter-organ level, detailing interactions between immune cells of key organs and compartments affected during ACLF, including the liver, circulation, brain, gut and kidney. Finally, we summarize the latest preclinical and clinical findings exploring biomarkers of immune dysfunction and immunomodulatory therapeutic strategies aimed at restoring immune homeostasis in patients with ACLF.