DNA methylation is a key epigenetic modification involved in gene regulation whose contribution to disease susceptibility remains to be fully understood. Here, we present a novel Bayesian smoothing approach (called ABBA) to detect differentially methylated regions (DMRs) from whole-genome bisulfite sequencing (WGBS). We also show how this approach can be leveraged to identify disease-associated changes in DNA methylation, suggesting mechanisms through which these alterations might affect disease. From a data modeling perspective, ABBA has the distinctive feature of automatically adapting to different correlation structures in CpG methylation levels across the genome while taking into account the distance between CpG sites as a covariate. Our simulation study shows that ABBA has greater power to detect DMRs than existing methods, providing an accurate identification of DMRs in the large majority of simulated cases. To empirically demonstrate the method’s efficacy in generating biological hypotheses, we performed WGBS of primary macrophages derived from an experimental rat system of glomerulonephritis and used ABBA to identify >1000 disease-associated DMRs. Investigation of these DMRs revealed differential DNA methylation localized to a 600 bp region in the promoter of the Ifitm3 gene. This was confirmed by ChIP-seq and RNA-seq analyses, showing differential transcription factor binding at the Ifitm3 promoter by JunD (an established determinant of glomerulonephritis), and a consistent change in Ifitm3 expression. Our ABBA analysis allowed us to propose a new role for Ifitm3 in the pathogenesis of glomerulonephritis via a mechanism involving promoter hypermethylation that is associated with Ifitm3 repression in the rat strain susceptible to glomerulonephritis.