Expression of the surface antigen gene (S gene) of hepatitis B virus is directed by two distinct promoter elements with markedly different activities. The upstream (pre-S1) promoter produces a 2.4-kb transcript at very low levels while the downstream (pre-S2) promoter produces an approximately 2.1-kb transcript in relative abundance. We have constructed a series of internal deletion mutants to analyze differential regulation of the two S gene promoters. We show here that expression directed by the pre-S1 promoter is negatively regulated by DNA sequences containing the downstream pre-S2 promoter region. Nuclear run-on analysis indicates this down-regulation to be at the level of transcription. Furthermore, promoter repression does not appear to be due to products of the S gene region. Deletion mutagenesis studies have permitted the localization of a 61-bp region that may be involved in the apparent down-regulation of the pre-S1 promoter. These results suggest the use of an unusual regulatory mechanism by a dipromoter gene in which an active internal promoter may preclude efficient use of an upstream promoter.