Interferons inhibit replication of hepatitis B virus (HBV). The mechanism for this inhibition was investigated by analyzing the effect of interferons on transcription of a chloramphenicol acetyltransferase reporter gene under control of HBV regulatory sequences and by determining the steady-state level of viral mRNAs in permanently HBV-transfected HepG2 cells. Low doses (100 U/ml) of alpha interferon (IFN-alpha) but not IFN-gamma inhibited chloramphenicol acetyltransferase expression in cultured cells transfected with plasmids containing the HBV enhancer linked to either HBV or simian virus 40 promoters. IFN-alpha also lowered expression of HBV mRNA in HBV-transfected HepG2 cells actively replicating virus, suggesting that IFN-alpha inhibits HBV replication by reducing transcription of viral genes driven by the HBV enhancer.