Dysregulated lipid metabolism promotes persistent microglial activation and neuroinflammation in Alzheimer's disease (AD), but the underlying pathogenic mechanisms remain to be elucidated, and druggable targets remain to be identified. Here we found that multifunctional enzyme type 2 (MFE-2), the key enzyme regulating fatty acid β-oxidation in the peroxisome, was downregulated in the microglia of humans with AD and AD model mice. Microglia-specific ablation of MFE-2 drove microglial abnormalities, neuroinflammation and Aβ deposition in AD models. Mechanistically, MFE-2 deficiency facilitated lipid accumulation, resulting in excessive arachidonic acid, mitochondrial reactive oxygen species and proinflammatory cytokine production by microglia. The compound 3-O-cyclohexane carbonyl-11-keto-β-boswellic acid (CKBA) bound to MFE-2 and restored MFE-2 levels, ameliorating AD pathology by inhibiting microglial overactivation. Collectively, our data revealed a pathogenic role of microglia with impaired lipid metabolism in AD and identified MFE-2 as a druggable target of CKBA, which restores its expression and has therapeutic potential for treating AD.