We previously showed that hepatitis B surface antigen (HBsAg)-producing transgenic mice were more sensitive to hepatocarcinogens than their normal littermates were. We have now investigated the regulation of hepatitis B virus (HBV) gene expression in carcinogen-induced liver tumors of HBV-carrier transgenic mice and in three cell lines derived from tumor samples. Transcription of the S gene was repressed in 17 tumors even though they had normal levels of liver-specific mRNAs such as albumin and transferrin. Three hepatoma cell lines, derived from independent tumor samples, were analyzed for their capacity to express the S gene after transfection of cloned DNA. Although they no longer expressed the endogenous S gene, they were still able to express it from transfected viral DNA both transiently and stably. The loss of HBsAg expression in tumors and in the cell lines was accompanied by de novo methylation of the S region, which is a way to permanently repress gene expression. Our data confirm in an animal model previous observations of S-gene expression in human hepatocarcinoma and suggest a role for its downregulation in tumor progression. © 1994 Wiley-Liss, Inc.