As circulating monocytes enter the site of disease, the local microenvironment instructs their differentiation into tissue macrophages (MΦ). To identify mechanisms that regulate MΦ differentiation, we studied human leprosy as a model, since M1-type antimicrobial MΦ predominate in lesions in the self-limited form, whereas M2-type phagocytic MΦ are characteristic of the lesions in the progressive form. Using a heterotypic co-culture model, we found that unstimulated endothelial cells (EC) trigger monocytes to become M2 MΦ. However, biochemical screens identified that IFN-γ and two families of small molecules activated EC to induce monocytes to differentiate into M1 MΦ. The gene expression profiles induced in these activated EC, when overlapped with the transcriptomes of human leprosy lesions, identified Jagged1 (JAG1) as a potential regulator of MΦ differentiation. JAG1 protein was preferentially expressed in the lesions from the self-limited form of leprosy, and localized to the vascular endothelium. The ability of activated EC to induce M1 MΦ was JAG1-dependent and the addition of JAG1 to quiescent EC facilitated monocyte differentiation into M1 MΦ with antimicrobial activity against M. leprae. Our findings indicate a potential role for the IFN-γ-JAG1 axis in instructing MΦ differentiation as part of the host defense response at the site of disease in human leprosy.