AbstractTheAPOE4variant of apolipoprotein E (apoE) is the most prevalent genetic risk allele associated with late‐onset Alzheimer's disease (AD). ApoE interacts with complement regulator factor H (FH), but the role of this interaction in AD pathogenesis is unknown. Here we elucidate the mechanism by which isoform‐specific binding of apoE to FH alters Aβ1‐42‐mediated neurotoxicity and clearance. Flow cytometry and transcriptomic analysis reveal that apoE and FH reduce binding of Aβ1‐42 to complement receptor 3 (CR3) and subsequent phagocytosis by microglia which alters expression of genes involved in AD. Moreover, FH forms complement‐resistant oligomers with apoE/Aβ1‐42 complexes and the formation of these complexes is isoform specific with apoE2 and apoE3 showing higher affinity to FH than apoE4. These FH/apoE complexes reduce Aβ1‐42 oligomerization and toxicity, and colocalize with complement activator C1q deposited on Aβ plaques in the brain. These findings provide an important mechanistic insight into AD pathogenesis and explain how the strongest genetic risk factor for AD predisposes for neuroinflammation in the early stages of the disease pathology.