Microglia are myeloid‐derived cells that colonize the central nervous system (CNS) at early stages of development and constitute up to 20% of the glial populations throughout life. While extensive progress has been recently made in identifying the cellular origin of microglia, the mechanism whereby the cells acquire the unique ramified and quiescent phenotype within the CNS milieu remains unknown. Here, we show that upon co‐culturing of either CD117⁺/Lin⁻ hematopoietic progenitors or CD11c⁺ bone marrow derived cells with organotypic hippocampal slices or primary glia, the cells acquire a ramified morphology concomitant with reduced levels of CD86, MHCII, and CD11c and up‐regulation of the microglial cell–surface proteins CX₃CR1 and Iba‐1. We further demonstrate that the transforming growth factor beta (TGF‐β) signaling pathway via SMAD2/3 phosphorylation is essential for both primary microglia and myeloid‐derived cells in order to acquire their quiescent phenotype. Our study suggests that the abundant expression of TGF‐β within the CNS during development and various inflammatory processes plays a key role in promoting the quiescent phenotype of microglia and may thus serve as a target for therapeutic strategies aimed at modulating the function of microglia in neurodegenerative diseases such as Alzheimer's and prion. © 2012 Wiley Periodicals, Inc.