Perinatal inflammatory stress in preterm babies is associated with increased rates of severe retinopathy of prematurity (ROP) and adverse neurological dysfunction. In this study, we set out to determine the consequences of severe systemic inflammatory stress on developmental retinal vascularization and evaluate the subsequent outcome on retinal function in later life. Systemic inflammatory stress was induced in C57BL/6J mouse pups by an intraperitoneal injection of lipopolysaccharide (LPS; 1 mg/kg) at postnatal day 4. In response to LPS, retinal inflammation was confirmed by quantitative RT-PCR analysis of diverse inflammatory markers. A detailed and systematic analysis of retinal microglial infiltration, retinal vascular morphology, density, and growth rate was performed at key time points throughout retinal vascularization. Retinal function in adult life was assessed by using electroretinography at 6 weeks postinjection. As early as 48 hours after intraperitoneal administration of LPS, a significant increase in retinal vascular density was noted throughout the retina. A pronounced increase in the number of activated microglial cell was observed in the retinal ganglion cell layer and in the outer plexiform layer just prior to their vascularization; direct physical contact between activated microglia and sprouting vessels suggested that microglia partake in promoting the aberrant retinal vascularization. With maturity, animals subjected to perinatal inflammatory stress displayed depleted retinal vascular beds and had significantly decreased retinal function as determined by electroretinography. Our data reveal that early severe postnatal inflammatory stress leads to abnormal retinal vascular development and increased vessel anastomosis and, ultimately, permanently compromises retinal function. The aberrant and initially exaggerated retinal vascularization observed is associated with microglial activation, providing a cellular mechanism by which perinatal sepsis predisposes to ROP.