The hepatitis B virus X protein (HBX) is essential for the establishment of HBV infection in vivo and exerts a pleiotropic effect on diverse cellular functions. The yeast two-hybrid system had indicated that HBX could interact with two subunits of the 26S proteasome. Here we demonstrate an association in vivo of HBX with the 26S proteasome complex by coimmunoprecipitation and colocalization upon sucrose gradient centrifugation. Expression of HBX in HepG2 cells caused a modest decrease in the proteasome’s chymotrypsin- and trypsin-like activities and in hydrolysis of ubiquitinated lysozyme, suggesting that HBX functions as an inhibitor of proteasome. In these cells, HBX is degraded with a half-life of 30 min. Proteasome inhibitors retarded this rapid degradation and caused a marked increase in the level of HBX and an accumulation of HBX in polyubiquitinated form. Thus, the low intracellular level of HBX is due to rapid proteolysis by the ubiquitin-proteasome pathway. Surprisingly, the proteasome inhibitors blocked the transactivation by HBX, and this effect was not a result of a squelching phenomenon due to HBX accumulation. Therefore, proteasome function is possibly required for the transactivation function of HBX. The inhibition of protein breakdown by proteasomes may account for the multiple actions of HBX and may be an important feature of HBV infection, possibly in helping stabilize viral gene products and suppressing antigen presentation.