Gastric cancer has striking heterogeneity in histological pattern, cellular phenotype, genotype, biomarkers, and biological behavior. We focused on the specific morphological papillary phenotype of gastric adenocarcinoma and attempted to identify its distinct molecular characteristics. In our comparative study, early stage papillary (papillary-dominant) gastric cancer showed a significantly higher and more widespread high-frequency microsatellite instability (MSI-H) than other morphological types. Analysis of mutations in a panel of five putative microsatellite instability (MSI)-associated genes in the MSI-H cases revealed that papillary or papillary-dominant cancer displays a unique profile of mutations compared to profiles previously reported in gastric cancer. Immunohistochemical staining and methylation analysis revealed that silencing of hMLH1 by methylation in its promoter region was responsible for the failure of mismatch repair in papillary-type gastric cancer, whereas aberrant promoter methylation of hMLH1 was not found in any cases without the unique mutator phenotype. Promoter hypermethylation of the hMLH1 genes was found to a lesser degree in the adjacent non-tumor mucosa in four of the 10 cases with tumor having the mutator phenotype. Microsatellite instability itself could not be detected in the adjacent non-tumor mucosa. Inactivation of hMLH1 expression by promoter hypermethylation may be an early event in carcinogenesis of this type of gastric cancer, preceding the development of the clear MSI phenotype of papillary carcinoma.