The ability of stem cells to self-renew or differentiate is largely dictated by the signals derived from their local microenvironment where they reside, also known as the stem cell niche. During Drosophila larval hematopoiesis, the HSC (Hematopoietic stem cell) niche in the lymph gland regulates stem cell self-renewal and their capacity to rapidly differentiate into hemocyte lineages with immune function. Bacterial challenge is known to activate signalling pathways that initiate the humoral immune response in flies. Infection is likely to induce localized changes in the niche triggering the production of factors that promote HSC differentiation. However, the mechanisms by which the HSC’s undergo this rapid switch towards the differentiation program is unknown. We show that septate junctions form a previously uncharacterized permeability barrier at the HSC niche regulating the accessibility of the HSC’s to niche derived signals. We demonstrate that bacterial infection breaches this permeability barrier and leads to a dynamic outburst of differentiation. Also, genetic disruption of septate junctions at the niche mimics immune activation and provides immune-protection to the flies improving their survival post infection. Our results attribute a novel role for occluding junctions at the HSC niche in acting as a molecular switch between developmental and infection induced hematopoiesis.