Fifty-nine transgenic mice from a lineage that overproduces the hepatitis B virus large envelope polypeptide and accumulates high intrahepatic concentrations of hepatitis B surface antigen were followed for evidence of liver disease throughout their 24-month life span. By 4 months of age all mice displayed biochemical and histological evidence of moderately severe chronic hepatitis which was followed sequentially by the development of regenerative nodules and oval cell hyperplasia (by 6 months), liver cell adenomas (by 8 months), and hepatocellular carcinomas (by 12 months of age). One hundred % of mice in this lineage developed hepatocellular carcinoma by 20 months of age, whereas no histopathological changes were observed in age- and sex-matched nontransgenic littermate controls over the same period of observation. These results indicate that overproduction of the hepatitis B virus large envelope polypeptide initiates a process characterized by liver cell injury, inflammation, and regenerative hyperplasia, which places large numbers of hepatocytes at risk for the development of transforming mutations, and inexorably progresses to hepatocellular carcinoma. We suggest that this is a general mechanism of hepatocarcinogenesis that may be operative in human hepatitis B virus infection and other necroinflammatory liver diseases as well.