L35 and FAO cells were derived as single cell isolates from H35 cells. Whereas L35 cells do not express microsomal triglyceride transfer protein (MTP), which regulates lipoprotein secretion, they express CYP7A1, which regulates bile acid synthesis from cholesterol. FAO cells display the opposite phenotype (i.e. expression of MTP but not CYP7A1). We examined the molecular basis of the transcriptional inactivation of the MTP gene in L35 cells. Nested deletion and mutagenesis studies show that a conserved DR1 element within the 135-bp proximal MTP promoter is responsible for differential expression by L35 and FAO cells. Yeast one-hybrid screening identified apolipoprotein A1 regulatory protein-1/chicken ovalbumin upstream promoter transcription factor II (ARP-1/COUP-TFII) and retinoid X receptor (RXRalpha) as the protein factors that can bind to the conserved DR1 element. Nuclear extracts from L35 cells contained 2-fold more ARP-1/COUP-TFII and 50% less RXRalpha than those from FAO cells. Immunologic studies show that in L35 cells, ARP-1/COUP-TFII is bound to the DR1 element, whereas in FAO cells, a complex containing RXRalpha is bound to the DR1 element. Co-transfection studies show that ARP-1/COUP-TFII repressed MTP promoter activity by approximately 70% in FAO hepatoma cells, whereas RXRalpha and its ligand 9-cis-retinoic acid increased MTP promoter activity by 6-fold in L35 cells. The combined data suggest that in the context of the MTP promoter, ARP-1/COUP-TFII (repressor) and a complex containing RXRalpha (inducer) compete for the DR1 element. Analysis of the CYP7A1 promoter revealed that it is approximately 5-fold more active in L35 cells than in FAO cells. Co-transfection of an ARP-1/COUP-TFII expression vector showed that it enhances CYP7A1 promoter activity by 6-fold in FAO cells. These combined findings indicate that ARP-1/COUP-TFII acts as both a transcriptional repressor (of MTP) and as a transcription activator (of CYP7A1). This dual function of ARP-1/COUP-TFII may play an important role in determining the metabolic phenotype of individual liver cells.