This study investigates the role of 25-hydroxycholesterol (25HC), a metabolite produced by cholesterol hydroxylase encoded by the Ch25h gene, in modulating microglial function and its potential implications in Alzheimer's disease (AD) pathology. We demonstrated that 25HC impairs microglial surveillance, reduces phagocytic capacity, and increases the production of pro-inflammatory cytokines. In vivo two-photon microscopy revealed that 25HC administration diminishes microglial response to brain lesions, while flow cytometry confirmed reduced phagocytosis in both in vivo and in vitro models. Additionally, amyloid-beta (Aβ) was shown to upregulate Ch25h expression and elevate 25HC levels in microglia, exacerbating these functional impairments. Mechanistically, 25HC was found to enhance cholesterol esterification, disrupt cell membrane dynamics, and further reduce microglial mobility and phagocytosis. Treatment with Avasimibe, a cholesterol esterification inhibitor, restored membrane dynamics and microglial function, leading to attenuated AD pathology in a 5XFAD mouse model. These findings suggest that 25HC-induced changes in microglial function contribute to AD progression, and targeting cholesterol metabolism could offer therapeutic potential.