In transgenic mouse embryos, expression of a muscle-specific reporter, consisting of a chloramphenicol acetyltransferase gene linked to regulatory sequences from the rat myosin light chain 1/3 locus (MLC-CAT), is graded in developing axial muscles along the rostrocaudal axis and in cell cultures derived from these muscles. Here we demonstrate that maintenance of positional differences in MLC-CAT transgene expression cannot be attributed to differences in the transcriptional competence of corresponding muscles. Rather, patterns of transgene expression are reflected in the extent of CpG demethylation of both MLC1 promoter and MLC enhancer sequences. Variations in reporter gene expression can be reconstituted by in vitro methylation of specific CpGs in transfected MLC-CAT DNA. As the MLC-CAT transgene is activated during embryogenesis, demethylation of the MLC1 promoter lags behind that of the downstream MLC enhancer, which appears to be the initial target for epigenetic modification. In developing somites, demethylation of the transgenic MLC enhancer is not graded and therefore does not reflect early regional differences in MLC-CAT transgene expression patterns. These studies implicate selective methylation in the maintenance rather than in the establishment of transcriptional differences in developing muscles.