Phase variation of the outer membrane protein Ag43 in E. coli requires deoxyadenosine methylase (Dam) and OxyR. Previously, it was shown that OxyR is required for repression of the Ag43-encoding gene, agn43, and that Dam-dependent methylation of three GATC target sequences in the regulatory region abrogates OxyR binding. Here we report further characterization of agn43 transcription and its regulation. Transcription was initiated from a sigma(70)-dependent promoter at the G residue of the upstream GATC sequence. Template DNA and RNA polymerase were sufficient to obtain transcription in vitro, but DNA methylation enhanced the level of transcription. Analyses of transcription in vivo of agn'-lacZ with mutated Dam target sequences support this conclusion. Since methylation also abrogates OxyR binding, this indicates that methylation plays a dual role in facilitating agn43 transcription. In vitro transcription from an unmethylated template was repressed by OxyR(C199S), which resembles the reduced form of OxyR. Consistent with this and the role of Dam in OxyR binding, OxyR(C199S) protected from DNase I digestion the agn43 regulatory region from -16 to +42, which includes the three GATC sequences. Deletion analyses of the regulatory region showed that a 101-nucleotide region of the agn43 regulatory region containing the promoter and this OxyR binding region was sufficient for Dam- and OxyR-dependent phase variation