Expression and DNA methylation of the Moloney murine leukemia virus (M-MuLV) genome were investigated in murine teratocarcinoma cells after virus infection. The newly acquired viral genome was devoid of methylation, yet its expression was repressed. The integrated viral genome in undifferentiated teratocarcinoma cells was methylated within 15 days after infection. Although 5-azacytidine decreased the level of DNA methylation, it did not activate M-MuLV in undifferentiated cells. Activation by 5-azacytidine occurred only in differentiated teratocarcinoma cells. Thus two independent mechanisms seem to regulate gene expression during the course of differentiation. The first mechanism operates in undifferentiated cells to block expression of M-MuLV and other exogeneously acquired viral genes, such as SV40 and polyoma virus, and does not depend on DNA methylation. The second mechanism relates only to differentiated cells and represses expression of genes in which DNA is methylated.