Several recent observations have suggested that cytosine methylation has a role in the in vivo transcriptional regulation of cell-specific genes in normal cells. We hypothesized that methylation regulates T1alpha, a gene expressed primarily in lung in adult rodents. In fetuses T1alpha is expressed in several organs, including the entire nervous system, but during development its expression is progressively restricted to lung alveolar type I epithelial cells, some osteoblasts and choroid plexus. Here we report that T1alpha is methylated at a key Sp1 site in the proximal promoter in cells and organs, including brain, where no gene expression is detectable. Conversely, in T1alpha-expressing cells, these sites are not methylated. In embryonic brain T1alpha is unmethylated and expressed; in adult brain the gene is methylated and not expressed. In lung epithelial cell lines, methylation of the T1alpha promoter in vitro decreases expression by approx. 50% (the maximum suppression being 100%). Analysis of mutated promoter constructs indicates that a single Sp1 site in the proximal promoter provides all or most of the methylation-sensitive gene silencing. We conclude that, in addition to regulation by transcription factors, cytosine methylation has a role in the complex expression patterns of this gene in intact animals and primary cells.