Multiple regions on the chromosome arm 3p are frequently affected by loss of heterozygosity in human cancers. A candidate tumor suppressor gene is TMEM7, at 3p21.3, which encodes a transmembrane protein. TMEM7 is expressed specifically in the liver, and the encoded protein shares substantial sequence homology with human and mouse 28-kDa interferon-alpha (IFN-alpha) responsive protein. In investigation of the possible role of TMEM7 in development of hepatocellular carcinoma (HCC), we examined TMEM7 expression in 20 primary HCC and 18 HCC cell lines and found recurrent functional alterations. Although TMEM7 mRNA was expressed in normal hepatic cells, downregulation or inactivation of the gene was detected in 85% of primary HCC and 33% of HCC cell lines. To identify the mechanisms responsible, we examined genomic deletion and mutation, and also the effect of inhibitors of DNA methyltransferase and histone deacetylase on cells with low or no endogenous TMEM7 expression. Homozygous deletion of TMEM7 was not detected in 17 pairs of human HCC and corresponding noncancerous liver tissues, nor in any of the 18 HCC cell lines. TMEM7 mutation was not detected in the 18 HCC cell lines (low or normal TMEM7 expression). Treatment of two of six cell lines exhibiting downregulation or loss of TMEM7 with 5-aza-2'-deoxycytidine and trichostatin A yielded additive increase in TMEM7 expression, implicating aberrant DNA methylation and histone deacetylation in transcriptional silencing of this gene. Ectopic expression of TMEM7 in two TMEM7-deficient HCC lines suppressed cell proliferation, colony formation, and cell migration in vitro and reduced tumor formation in nude mice. Treatment of two highly invasive HCC cell lines with IFN-alpha for 7 days significantly increased TMEM7 expression and inhibited cell migration. These findings implicate loss of TMEM7 expression in hepatocarcinogenesis and suggest that modification of TMEM7 expression by IFN-alpha may have therapeutic relevance in a subset of HCC.