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, whereas TLR2 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.