Shortage of functional hepatocytes hampers drug safety testing and therapeutic applications because mature hepatocytes cannot be expanded and maintain functions in vitro. Recent studies have reported that liver progenitor cells can originate from mature hepatocytes in vivo. Derivation of proliferating progenitor cells from mature hepatocytes, and re-differentiation into functional hepatocytes in vitro has not been successful. Here we report the derivation of novel mesenchymal-like stem cells (arHMSCs) from adult rat hepatocytes. Immunofluorescence and flow cytometry characterization of arHMSCs found expression of mesenchymal markers CD29, CD44, CD90, vimentin and alpha smooth muscle actin. These arHMSCs proliferated in vitro for 4 passages yielding 104 fold increase in cell number in 28 days, and differentiated into hepatocyte-like cells (arHMSC-H). The arHMSC-H expressed significantly higher level of hepatocyte-specific markers (200 fold for albumin and 6 fold for Cyp450 enzymes) than arHMSCs. The arHMSC-H also demonstrated dose response curves similar to primary hepatocytes for 3 of the 6 paradigm hepatotoxicants tested, demonstrating utility in drug safety testing applications.