This study focused on assessing the knowledge, practice and challenges of implementing differentiated instruction by primary school teachers in Bahir Dar City. To do so, mixed sequential explanatory design was utilized and six research questions were included. Data was collected using questionnaire and semi-structured interview from 103 randomly selected teachers and 5 supervisors selected with comprehensive sampling. The quantitative data was analyzed using percentage, mean, standard deviation, independent sample t-test, one WayANOVA, and correlation. The qualitative data were also analyzed thematically. The findings revealed that: majority of teachers were not familiar with differentiated instruction strategies. The practices of differentiated instruction by primary school teachers were also low. While teachers’ knowledge and practice of differentiated instruction were not significantly differentiated by their sex, significant difference obtained across their level of education, teaching experience and subjects they taught. Large positive correlation was also obtained between teachers’ knowledge and practice of differentiated instruction. Large class size and students’ diversity, lack of time, lack of training, and lack of materials were found as main challenges of implementing differentiated instruction. Equipping teachers with the appropriate knowledge of differentiated instruction and its practice both in in-service and pre-service training, considering teacher student ratio in the classroom, supervision and evaluation of school administrators’ on how to help teachers in dealing with challenges, reducing teachers’ workload and extending the duration were recommendations forwarded.