Despite the prominent role of TDP-43 in neurodegeneration, its physiological and pathological functions are not fully understood. Here, we report an unexpected role of TDP-43 in the formation of dynamic, reversible, liquid droplet-like nuclear bodies (NBs) in response to stress. Formation of NBs alleviates TDP-43-mediated cytotoxicity in mammalian cells and fly neurons. Super-resolution microscopy reveals distinct functions of the two RRMs in TDP-43 NB formation. TDP-43 NBs are partially colocalized with nuclear paraspeckles, whose scaffolding lncRNA NEAT1 is dramatically upregulated in stressed neurons. Moreover, increase of NEAT1 promotes TDP-43 liquid-liquid phase separation (LLPS) in vitro. Finally, we discover that the ALS-associated mutation D169G impairs the NEAT1-mediated TDP-43 LLPS and NB assembly, causing excessive cytoplasmic translocation of TDP-43 to form stress granules, which become phosphorylated TDP-43 cytoplasmic foci upon prolonged stress. Together, our findings suggest a stress-mitigating role and mechanism of TDP-43 NBs, whose dysfunction may be involved in ALS pathogenesis. Display omitted •Stress induces phase-separated TDP-43 NBs to alleviate cytotoxicity•The two RRMs respond to different RNAs and act distinctly in the assembly of TDP-43 NBs•LncRNA NEAT1 promotes TDP-43 LLPS and is upregulated in stressed neurons•The ALS-causing D169G mutation is NB-defective and forms pTDP-43 cytoplasmic foci The RNA-binding protein TDP-43 is associated with neurodegenerative diseases, such as ALS. Wang et al. report that TDP-43 forms protective nuclear bodies in response to stress, which is mediated by lncRNA NEAT1-promoted liquid-liquid phase separation. Defects in the assembly of stress-mitigating TDP-43 nuclear bodies may contribute to ALS pathogenesis.