We have studied the mechanism by which DNA methylation inhibits transcription both in cell-free nuclear extracts and in the living cell. Repression of transcription in vitro for four different promoters was shown to be an indirect effect. The mediator of repression had properties indistinguishable from those of a methyl-CpG binding protein (MeCP-1) that has been previously identified. Use of differentially methylated promoters and methylated competitors in transient transfection assays suggested that indirect repression via MeCP-1 also occurs in the living cell. This was supported by the fact that MeCP-1-deficient cells showed much reduced repression of methylated genes.