Aberrant expression of the alpha-fetoprotein (AFP) gene is characteristic of a majority of hepatocellular carcinoma cases and serves as a diagnostic tumor-specific marker. By dissecting regulatory mechanisms through electromobility gel shift, transient-transfection, Western blot, and in vitro transcription analyses, we find that AFP gene expression is controlled in part by mutually exclusive binding of two trans-acting factors, p53 and hepatic nuclear factor 3 (HNF-3). HNF-3 protein activates while p53 represses AFP transcription through sequence-specific binding within the previously identified AFP developmental repressor domain. A single mutation within the DNA binding domain of p53 protein or a mutation of the p53 DNA binding element within the AFP developmental repressor eliminates p53-repressive effects in both transient-transfection and cell-free expression systems. Coexpression of p300 histone acetyltransferase, which has been shown to acetylate p53 and increase specific DNA binding, amplifies the p53-mediated repression. Western blot analysis of proteins present in developmentally staged, liver nuclear extracts reveal a one-to-one correlation between activation of p53 protein and repression of AFP during hepatic development. Induction of p53 in response to actinomycin D or hypoxic stress decreases AFP expression. Studies in fibroblast cells lacking HNF-3 further support a model for p53-mediated repression that is both passive through displacement of a tissue-specific activating factor and active in the presence of tissue-specific corepressors. This mechanism for p53-mediated repression of AFP gene expression may be active during hepatic differentiation and lost in the process of tumorigenesis.