Treatment of Friend erythroleukemia cells with the antileukemic drugs 5-azacytidine and 5-aza-2'-deoxycytidine leads to rapid, time-dependent, and dose-dependent decrease of DNA methyltransferase activity and synthesis of markedly undermethylated DNA. Since this DNA is at least partially methylated in vivo and serves as an excellent substrate for methylation in vitro, hypomethylation of DNA in analog-treated cells appears to result from the loss of DNA methyltransferase, rather than from an inherent inability of 5-azacytosine- substituted DNA to serve as a methyl acceptor. Inhibition of DNA synthesis blocks the loss of DNA methyltransferase activity while inhibitors of RNA synthesis do not, suggesting that the analogs must be incorporated into DNA to mediate their effect on the enzyme, and that minor substitution of 5-azacytosine for cytosine in DNA (approximately 0.3%) suffices to inactivate more than 95% of the enzyme in the cell. Several lines of evidence link changes in the pattern of DNA modification with differentiation. In this regard, it is significant that 5-azacytidine and 5-aza-2'-deoxycytidine act as weak inducers of erythroid differentiation of Friend erythroleukemia cells in the same concentration range where they affect DNA methyltransferase activity. For differentiation to proceed, the cells must be washed free of the drugs. Less than 24 h later, normal levels of DNA methyltransferase activity are restored and within 48 h, DNA isolated from the cells is not detectably undermethylated. This may in part explain why 5-azacytidine and 5-aza-2'-deoxycytidine induce differentiation in less than 15% of the population despite their initial profound effect on DNA methylation.