Hematopoietic stem cells/progenitor cells (HSC/HPCs) orchestrate the hematopoietic process, effectively regulated by the hematopoietic niche under normal and stressed conditions. The hematopoietic niche provides various soluble factors which influence the differentiation and self-renewal of HSC/HSPs. Unceasing differentiation/proliferation/high metabolic activity of HSC/HPCs makes them susceptible to damage by environmental toxicants like benzene. Oxidative stress, epigenetic modifications, and DNA damage in the HSC/HPCs are the key factors of benzene-induced hematopoietic injury. However, the role of the hematopoietic niche in benzene-induced hematopoietic injury/response is still void. Therefore, the current study aims to unravel the role of the hematopoietic niche in benzene-induced hematotoxicity using a genetically tractable model, Drosophila melanogaster. The lymph gland is a dedicated hematopoietic organ in Drosophila larvae. A group of 30–45 cells called the posterior signaling center (PSC) in the lymph gland acts as a niche that regulates Drosophila HSC/HPCs maintenance. Benzene exposure to Drosophila larvae (48 h) resulted in aberrant hemocyte production, especially hyper-differentiation of lamellocytes followed by premature lymph gland dispersal and reduced adult emergence upon developmental exposure. Subsequent genetic experiments revealed that benzene-induced lamellocyte production and premature lymph gland dispersal were PSC mediated. The genetic experiments further showed that benzene generates Dual oxidase (Duox)-dependent Reactive Oxygen Species (ROS) in the PSC, activating Toll/NF-κB signaling, which is essential for the aberrant hemocyte production, lymph gland dispersal, and larval survival. Together, the study establishes a functional perspective of the hematopoietic niche in a benzene-induced hematopoietic emergency in a genetic model, Drosophila, which might be relevant to higher organisms.