Several genetic risk factors for Alzheimer's disease implicate genes involved in lipid metabolism and many of these lipid genes are highly expressed in glial cells. However, the relationship between lipid metabolism in glia and Alzheimer's disease pathology remains poorly understood. Through single-nucleus RNA sequencing of brain tissue in Alzheimer's disease, we have identified a microglial state defined by the expression of the lipid droplet-associated enzyme ACSL1 with ACSL1-positive microglia being most abundant in patients with Alzheimer's disease having the APOE4/4 genotype. In human induced pluripotent stem cell-derived microglia, fibrillar Aβ induces ACSL1 expression, triglyceride synthesis and lipid droplet accumulation in an APOE-dependent manner. Additionally, conditioned media from lipid droplet-containing microglia lead to Tau phosphorylation and neurotoxicity in an APOE-dependent manner. Our findings suggest a link between genetic risk factors for Alzheimer's disease with microglial lipid droplet accumulation and neurotoxic microglia-derived factors, potentially providing therapeutic strategies for Alzheimer's disease.