ABSTRACT Inheritance of APOE alleles is associated with varying clinical outcomes in several neurodegenerative diseases that are associated with innate immune response in brain. We tested the hypothesis that inheritance of different APOE alleles would significantly modulate neurotoxicity arising from glial innate immune response. We first used dissociated cultures of wild‐type (wt) murine neurons and glia derived from mice with targeted replacement (TR) of the ε2, ε3, or, ε4 APOE allele. Our results showed that the vast majority of bystander damage to wt neurons derived from microglia was greatest with TR APOE4 glia, intermediate from TR APOE3 glia, and least from TR APOE2 glia and preceded detectable NO secretion. Microglial p38MAPK‐dependent cytokine secretion followed a similar pattern of TR APOE dependence. In hippocampal slice cultures, innate immune activation had a similar pattern of TR APOE‐dependence and produced postsynaptic neuronal damage in TR APOE4 and TR APOE3 but not TR APOE2 cultures that was p38MAPK dependent. These findings suggest a new mechanism by which inheritance of different APOE alleles may influence the outcome of neurodegenerative diseases associated with microglial innate immune response.