During progression, luminal muscle-invasive bladder cancer (MIBC) can transition to the aggressive basal-squamous (Ba/Sq) subtype. Reduced expression of forkhead box A1 (FOXA1) in the urothelium is a hallmark and driver of the Ba/Sq transcriptional state and squamous differentiation (SqD). Ba/Sq tumors are highly inflamed, however, the specific inflammatory pathways contributing to the Ba/Sq state are unknown. In this study, transcriptomic analyses of The Cancer Genome Atlas MIBC cohort were performed to determine whether immune response gene signatures were associated with MIBC molecular states. Results showed that Ba/Sq MIBCs were enriched for the interferon-gamma (IFNγ)-dominant signature. Ba/Sq MIBCs exhibited increased IFNγ/JAK/STAT pathway activity, corresponding to reduced FOXA1 regulon activity. Immunohistochemistry of MIBC specimens demonstrated that JAK1 expression was significantly increased in tumor areas with SqD. IFNγ treatment of luminal MIBC cell lines significantly decreased the expression of luminal transcriptional drivers, including FOXA1, and increased the expression of Ba/Sq markers in a STAT1-dependent manner. RNA sequencing analyses identified IFNγ as a driver of the Ba/Sq state. The ability of IFNγ to repress FOXA1 in luminal cells was abrogated by ruxolitinib inhibition of JAK1/2 activity. Additionally, pharmacological inhibition or genetic ablation of JAK1 restored FOXA1 expression in Ba/Sq MIBC cells. These findings are the first to identify IFNγ as an epithelial cell-extrinsic mechanism to repress FOXA1 and drive the Ba/Sq state in MIBC.