Understanding the mechanisms controlling the stability of the differentiated cell state is a fundamental problem in biology. To characterize the critical regulatory events that control stem cell behavior and cell plasticity in vivo in an organism at the base of animal evolution, we have generated transgenic Hydra lines [Wittlieb, J., Khalturin, K., Lohmann, J., Anton-Erxleben, F., Bosch, T.C.G., 2006. Transgenic Hydra allow in vivo tracking of individual stem cells during morphogenesis. Proc. Natl. Acad. Sci. U. S. A. 103, 6208-6211] which express eGFP in one of the differentiated cell types. Here we present a novel line which expresses eGFP specifically in zymogen gland cells. These cells are derivatives of the interstitial stem cell lineage and have previously been found to express two Dickkopf related genes [Augustin, R., Franke, A., Khalturin, K., Kiko, R., Siebert, S. Hemmrich, G., Bosch, T.C.G., 2006. Dickkopf related genes are components of the positional value gradient in Hydra. Dev. Biol. 296 (1), 62-70]. In the present study we have generated transgenic Hydra in which eGFP expression is under control of the promoter of one of them, HyDkk1/2/4 C. Transgenic Hydra recapitulate faithfully the previously described graded activation of HyDkk1/2/4 C expression along the body column, indicating that the promoter contains all elements essential for spatial and temporal control mechanisms. By in vivo monitoring of eGFP+ gland cells, we provide direct evidence for continuous transdifferentiation of zymogen cells into granular mucous cells in the head region. We also show that in this tissue a subpopulation of mucous gland cells directly derives from interstitial stem cells. These findings indicate that both stem cell-based mechanisms and transdifferentiation are involved in normal development and maintenance of cell type complexity in Hydra. The results demonstrate a remarkable plasticity in the differentiation capacity of cells in an organism which diverged before the origin of bilaterian animals.