Met murine hepatocyte (MMH) lines were established from livers of transgenic mice expressing constitutively active human Met. These lines harbor two cell types: epithelial cells resembling the parental populations and flattened cells with multiple projections and a dispersed growth habit that are designated palmate. Epithelial cells express the liver-enriched transcription factors HNF4 and HNF1alpha, and proteins associated with epithelial cell differentiation. Treatments that modulate their differentiation state, including acidic FGF, induce hepatic functions. Palmate cells show none of these properties. However, they can differentiate along the hepatic cell lineage, giving rise to: (a) epithelial cells that express hepatic transcription factors and are competent to express hepatic functions; (b) bile duct-like structures in three-dimensional Matrigel cultures. Derivation of epithelial from palmate cells is confirmed by characterization of the progeny of individually fished cells. Furthermore, karyotype analysis confirms the direction of the phenotypic transition: palmate cells are diploid and the epithelial cells are hypotetraploid. The clonal isolation of the palmate cell, an immortalized nontransformed bipotential cell that does not yet express the liver-enriched transcription factors and is a precursor of the epithelial-hepatocyte in MMH lines, provides a new tool for the study of mechanisms controlling liver development.