Microglia-mediated neuroinflammation contributes to acute demyelination in neuromyelitis optica spectrum disorders (NMOSD). Soluble triggering receptor expressed on myeloid cells 2 (sTREM2) in the cerebrospinal fluid (CSF) has been associated with microglial activation in several neurodegenerative diseases. However, the basis for this immune-mediated attack and the pathophysiological role of sTREM2 in NMOSD remain to be elucidated. Here, we performed Mendelian randomization analysis and identified a genetic association between increased CSF sTREM2 and NMOSD risk. CSF sTREM2 was elevated in patients with NMOSD and was positively correlated with neural injury and other neuroinflammation markers. Single-cell RNA sequencing of human macrophage/microglia-like cells in CSF, a proxy for microglia, showed that increased CSF sTREM2 was positively associated with microglial dysfunction in patients with NMOSD. Furthermore, we demonstrated that sTREM2 is a reliable biomarker of microglial activation in a mouse model of NMOSD. Using unbiased transcriptomic and lipidomic screens, we identified that excessive activation, overwhelmed phagocytosis of myelin debris, suppressed lipid metabolism, and enhanced glycolysis underlie sTREM2-mediated microglial dysfunction, possibly through the nuclear factor kappa B (NF-κB) signaling pathway. These molecular and cellular findings provide a mechanistic explanation for the genetic association between CSF sTREM2 and NMOSD risk and indicate that sTREM2 could be a potential biomarker of NMOSD progression and a therapeutic target for microglia-mediated neuroinflammation.© The Author(s) 2023. Published by Oxford University Press on behalf of the Guarantors of Brain. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com.