Haplodeficiency of the microglia gene TREM2 increases risk for late-onset Alzheimer's disease (AD) but the mechanisms remain uncertain. To investigate this, we used high-resolution confocal and super-resolution (STORM) microscopy in AD-like mice and human AD tissue. We found that microglia processes, rich in TREM2, tightly surround early amyloid fibrils and plaques promoting their compaction and insulation. In Trem2- or DAP12-haplodeficient mice and in humans with R47H TREM2 mutations, microglia had a markedly reduced ability to envelop amyloid deposits. This led to an increase in less compact plaques with longer and branched amyloid fibrils resulting in greater surface exposure to adjacent neurites. This was associated with more severe neuritic tau hyperphosphorylation and axonal dystrophy around amyloid deposits. Thus, TREM2 deficiency may disrupt the formation of a neuroprotective microglia barrier that regulates amyloid compaction and insulation. Pharmacological modulation of this barrier could be a novel therapeutic strategy for AD.