The exact role of hepatitis B virus in the development of liver cancer is not known. The recent identification of a viral regulatory gene HBx suggests a possible direct involvement of the virus whereby the HBx protein, acting as a transcriptional transactivator of viral genes, may alter host gene expression and lead to the development of hepatocellular carcinoma. We have tested this possibility of placing the entire HBx gene under its own regulatory elements directly into the germline of mice. Transgenic animals harbouring this viral gene succumbed to progressive histopathological changes specifically in the liver, beginning with multifocal areas of altered hepatocytes, followed by the appearance of benign adenomas, and proceeding to the development of malignant carcinomas. Male mice developed disease and died much earlier than females. This transgenic animal model appears ideal for defining the molecular events that follow the expression of the viral HBx gene and are responsible for the development of liver cancer.