Microglia are specialised brain-resident macrophages that arise from primitive macrophages colonising the embryonic brain. Microglia contribute to multiple aspects of brain development, but their precise roles in early human brain remain poorly understood due to limited access to relevant tissues. The generation of brain organoids from induced human pluripotent stem cells (iPSC) recapitulates some key features of human embryonic brain development, but current approaches do not incorporate microglia and thus are lacking. Here, we generated microglia-sufficient brain organoids by co-culturing brain organoids with primitive-like macrophages generated from the same human iPSC (iMac). In organoid co-cultures, iMac differentiated into cells with microglia-like phenotypes and functions (iMicro), and modulated neuronal progenitor cell (NPC) differentiation, limiting NPC proliferation and promoting axonogenesis. Mechanistically, iMicro contained high levels of PLIN2+ lipid droplets that exported cholesterol and its esters which were taken up by NPC in the organoids. We also detected PLIN2+ lipid droplet-loaded microglia in mouse and human embryonic brain. Overall, our approach significantly advances current human brain organoid approaches by incorporating microglial cells, illustrated by the discovery of a key pathway of lipid-mediated crosstalk between microglia and NPC leading to improved neurogenesis.