NK cells are enriched in the liver, constituting around a third of intrahepatic lymphocytes. We have previously demonstrated that they upregulate the death ligand TRAIL in patients with chronic hepatitis B virus infection (CHB), allowing them to kill hepatocytes bearing TRAIL receptors. In this study we investigated whether, in addition to their pathogenic role, NK cells have antiviral potential in CHB. We characterised NK cell subsets and effector function in 64 patients with CHB compared to 31 healthy controls. We found that, in contrast to their upregulated TRAIL expression and maintenance of cytolytic function, NK cells had a markedly impaired capacity to produce IFN-γ in CHB. This functional dichotomy of NK cells could be recapitulated in vitro by exposure to the immunosuppressive cytokine IL-10, which was induced in patients with active CHB. IL-10 selectively suppressed NK cell IFN-γ production without altering cytotoxicity or death ligand expression. Potent antiviral therapy reduced TRAIL-expressing CD56(bright) NK cells, consistent with the reduction in liver inflammation it induced; however, it was not able to normalise IL-10 levels or the capacity of NK cells to produce the antiviral cytokine IFN-γ. Blockade of IL-10 +/- TGF-β restored the capacity of NK cells from both the periphery and liver of patients with CHB to produce IFN-γ, thereby enhancing their non-cytolytic antiviral capacity. In conclusion, NK cells may be driven to a state of partial functional tolerance by the immunosuppressive cytokine environment in CHB. Their defective capacity to produce the antiviral cytokine IFN-γ persists in patients on antiviral therapy but can be corrected in vitro by IL-10+/- TGF-β blockade.