We have analyzed the histological changes in rat liver after 2-acetylaminofluorene (AAF) administration. The data demonstrate that AAF-induced oval cells were preferentially generated by proliferation of the terminal biliary ductules that we suggest constitute the primary hepatic stem cell niche. The oval cells formed ductular structures, representing an extension of the canals of Hering. This histological organization provides continuous bile drainage of the hepatocytes and uninterrupted blood flow in the sinusoids. The oval cell ductules are surrounded by a continuous basement membrane that is intermittently disrupted by processes of stellate cells that form direct cell-cell contact with the oval cells. Although both AAF treatment and bile duct ligation results in proliferation of biliary epithelial cells, the mechanism(s) responsible for the proliferation of the biliary epithelium seems to differ in the two models. In contrast to the biliary proliferation stimulated by bile ligation, AAF-induced oval cell proliferation as well as the capacity of these cells to differentiate into hepatocytes, bile epithelial cells and possibly other cell lineages can be blocked by administration of dexamethasone.