The murine agouti locus regulates a switch in pigment synthesis between eumelanin (black/brown pigment) and phaeomelanin (yellow/red pigment) by hair bulb melanocytes. We recently described a spontaneous mutation, hypervariable yellow (Ahvy) and demonstrated that Ahvy is responsible for the largest range of phenotypes yet identified at the agouti locus, producing mice that are obese with yellow coats to mice that are of normal weight with black coats. Here, we show that agouti expression is altered both temporally and spatially in Ahvy mutants. Agouti expression levels are positively correlated with the degree of yellow pigmentation in individual Ahvy mice, consistent with results from other dominant yellow agouti mutations. Sequencing of 5' RACE and genomic PCR products revealed that Ahvy resulted from the integration of an intracisternal A particle (IAP) in an antisense orientation within the 5' untranslated agouti exon 1C. This retrovirus-like element is responsible for deregulating agouti expression in Ahvy mice; agouti expression is correlated with the methylation state of CpG residues in the IAP long terminal repeat as well as in host genomic DNA. In addition, the data suggest that the variable phenotype of Ahvy offspring is influenced in part by the phenotype of their Ahvy female parent.