The most common genetic mutation found in familial and sporadic amyotrophic lateral sclerosis (ALS), as well as fronto-temporal dementia (FTD), is a repeat expansion in the C9orf72 gene. C9orf72 is highly expressed in human myeloid cells, and although neuroinflammation and microglial pathology are widely found in ALS/FTD, the underlying mechanisms are poorly understood. Here, using human induced pluripotent stem cell-derived microglia-like cells (hiPSC-MG) harbouring C9orf72 mutation (mC9-MG) together with gene-corrected isogenic controls (isoC9-MG) and C9ORF72 knock-out hiPSC-MG (C9KO-MG), we show that reduced C9ORF72 protein is associated with impaired phagocytosis and an exaggerated inflammatory response upon stimulation with lipopolysaccharide, driven by sustained activation of NLRP3 inflammasome and NF-κB signalling. Analysis of the hiPSC-MG C9ORF72 interactome revealed an association of C9ORF72 with key regulators of autophagy, a process involved in the homeostatic regulation of the innate immune response. We found impaired initiation of autophagy in C9KO-MG and mC9-MG. Furthermore, through motor neuron-microglial (MN-MG) co-culture studies, we identified that autophagy deficit in mC9-MG led to increased vulnerability of C9 MNs to excitotoxic stimulus. Pharmacological activation of autophagy ameliorated the sustained activation of NLRP3 inflammasome and NF-κB signalling, reversed the phagocytic deficit found in mC9-MG and also reduced MN death in MN-MG co-cultures. We validated these findings in blood-derived macrophages from people with C9orf72 mutation. Our results reveal an important role for C9ORF72 in regulating microglial immune homeostasis and identify dysregulation in human myeloid cells as a contributor to neurodegeneration in ALS/FTD.