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Understanding the molecular pathways driving the acute antiviral and inflammatory response to SARS‐CoV‐2 infection is critical for developing treatments for severe COVID‐19. Here, we find decreasing number of circulating plasmacytoid dendritic cells (pDCs) in COVID‐19 patients early after symptom onset, correlating with disease severity. pDC depletion is transient and coincides with decreased expression of antiviral type I IFNα and of systemic inflammatory cytokines CXCL10 and IL‐6. Using an in vitro stem cell‐based human pDC model, we further demonstrate that pDCs, while not supporting SARS‐CoV‐2 replication, directly sense the virus and in response produce multiple antiviral (interferons: IFNα and IFNλ1) and inflammatory (IL‐6, IL‐8, CXCL10) cytokines that protect epithelial cells from de novo SARS‐CoV‐2 infection. Via targeted deletion of virus‐recognition innate immune pathways, we identify TLR7‐MyD88 signaling as crucial for production of antiviral interferons (IFNs), whereas Toll‐like receptor (TLR)2 is responsible for the inflammatory IL‐6 response. We further show that SARS‐CoV‐2 engages the receptor neuropilin‐1 on pDCs to selectively mitigate the antiviral interferon response, but not the IL‐6 response, suggesting neuropilin‐1 as potential therapeutic target for stimulation of TLR7‐mediated antiviral protection. Synopsis: Plasmacytoid dendritic cells (pDCs) sense SARS‐CoV‐2 via two distinct innate immune pathways. The endosomal TLR7 pathway is activated upon sensing of viral RNA and this leads to type I IFN production. The TLR2 pathway is triggered by sensing of the viral envelope protein, inducing IL‐6 production. Interestingly, SARS‐CoV‐2 is able to specifically antagonize the TLR7‐IFN pathway via a CD304‐mediated signaling cascade. Sensing of SARS‐CoV‐2 RNA by pDCs triggers a signaling cascade involving TLR7‐MyD88‐IRAK4‐TRAF6 to induce CXCL10 and, via IRF7 phosphorylation and translocation, type I and III Interferons. In parallel, SARS‐CoV‐2 envelope (E) glycoprotein is sensed by the extracellular TLR2/6 heterodimer facilitating production of IL‐6.The secreted type I and III IFNs initiate autocrine and paracrine signals that induce the expression of IFN stimulated genes (ISGs), thereby facilitating an antiviral response that protects local epithelial cells against SARS‐CoV‐2 infection.SARS‐CoV‐2 can counteract the protective IFN effects by inducing CD304 signaling, potentially interfering with IRF7 nuclear translocation, thereby inhibiting type I IFNα production and thus reducing the antiviral response generated by pDCs. [ABSTRACT FROM AUTHOR]