After entering tissues, monocytes differentiate into cells that share functional features with either macrophages or dendritic cells (DCs). How monocyte fate is directed toward monocyte-derived macrophages (mo-Macs) or monocyte-derived DCs (mo-DCs) and which transcription factors control these differentiation pathways remains unknown. Using an in vitro culture model yielding human mo-DCs and mo-Macs closely resembling those found in vivo in ascites, we show that IRF4 and MAFB were critical regulators of monocyte differentiation into mo-DCs and mo-Macs, respectively. Activation of the aryl hydrocarbon receptor (AHR) promoted mo-DC differentiation through the induction of BLIMP-1, while impairing differentiation into mo-Macs. AhR deficiency also impaired the in vivo differentiation of mouse mo-DCs. Finally, AHR activation correlated with mo-DC infiltration in leprosy lesions. These results establish that mo-DCs and mo-Macs are controlled by distinct transcription factors and show that AHR acts as a molecular switch for monocyte fate specification in response to micro-environmental factors.