DNA from mammalian cells has been shown to contain significant amounts of 5-methyl cytosine resulting from enzymatic transfer of methyl groups from s-adenosylmethionine to cytosine residues in the DNA polymer. The function of this modification is not known. We have found that DNA synthesized during chemically induced differentiation of friend erythroleukemia cells is hypomethylated, as measured by its ability to accept methyl groups transferred by homologous DNA methyltransferases in vitro. The extent of hypomethylation detected by this sensitive method is small, a decrease of less than 1.6 percent in 5-methylcytosine content. Hypomethylated DNA can be isolated from friend erythroleukemia cells grown in the presence of dimethyl sulfoxide, butyrate, hexamethylene-bis- acetamide, pentamethylene-bis acetamide, and ethionine. However, hypomethylated DNA is found only under conditions where differentiation is actually induced. DNA isolated from cells of a dimethyl sulfoxide- resistant subclone grown in the presence of that agent is not hypomethylated, although DNA of these cells becomes hypomethylated after growth in the presence of inducers that can trigger their differentiation. We also find that the DNA of friend erythroleukemia cells does not become hypomethylated when the cells are exposed to inducing agents in the presence of substances that inhibit differentiation. These results suggest a close link between genome modification by methylation and differentiation of friend erythroleukemia cells.