The recognition and phagocytosis of microbes by macrophages is a principal aspect of innate immunity that is conserved from insects to humans. Drosophila melanogaster has circulating macrophages that phagocytose microbes similarly to mammalian macrophages, suggesting that insect macrophages can be used as a model to study cell-mediated innate immunity. We devised a double-stranded RNA interference-based screen in macrophage-like Drosophila S2 cells, and have defined 34 gene products involved in phagocytosis. These include proteins that participate in haemocyte development, vesicle transport, actin cytoskeleton regulation and a cell surface receptor. This receptor, Peptidoglycan recognition protein LC (PGRP-LC), is involved in phagocytosis of Gram-negative but not Gram-positive bacteria. Drosophila humoral immunity also distinguishes between Gram-negative and Gram-positive bacteria through the Imd and Toll pathways, respectively; however, a receptor for the Imd pathway has not been identified. Here we show that PGRP-LC is important for antibacterial peptide synthesis induced by Escherichia coli both in vitro and in vivo. Furthermore, totem mutants, which fail to express PGRP-LC, are susceptible to Gram-negative (E. coli), but not Gram-positive, bacterial infection. Our results demonstrate that PGRP-LC is an essential component for recognition and signalling of Gram-negative bacteria. Furthermore, this functional genomic approach is likely to have applications beyond phagocytosis.