A line of hepatic endoderm cells, hepatoblast cell line 3 (HBC-3), was derived from the liver diverticulum of the mouse on day 9.5 of gestation by culture on a mitomycin C treated STON+ feeder layer in a hepatoblast culture medium consisting of Dulbecco's modified Eagle's medium, nonessential amino acids, fetal calf serum, and beta-mercaptoethanol. This line, HBC-3, stains positively for alpha-fetoprotein, albumin, and cytokeratin 14 (CK-14), protein markers expressed by the embryonic liver diverticulum, indicating that HBC-3 cells retain an undifferentiated hepatoblast phenotype. HBC-3 cells acquire hepatocyte-like ultrastructural characteristics, including bile canaliculi, peroxisomes, and glycogen granules, when maintained in culture for 3 weeks without passage. Treatment with dimethylsulfoxide or sodium butyrate induces a rapid hepatocytic differentiation. The cells cease to express alpha-fetoprotein and CK-14, maintain albumin expression, and become positive for glucose-6-phosphatase activity (a profile consistent with differentiation along the hepatocyte lineage). On Matrigel, HBC-3 cells form elaborate ductular structures, which are positive for gamma-glutamyl transpeptidase and CK-14 and CK-19 and do not express detectable amounts of albumin, a phenotypic change consistent with differentiation along the bile ductular lineage. Thus, HBC-3 cells behave in culture as bipotential hepatoblasts and provide a model system to identify factors that regulate bipotential differentiation in the liver.