In many cases, gene repression mediated by CpG methylation has been demonstrated. Two different mechanisms have been postulated to explain the repressive effect of methylated CpG DNA: establishment of a repressive chromatin configuration and inhibition of DNA binding of transactivating factors. Using the M-lysozyme gene, we analyzed gene expression, CpG demethylation and the in vivo formation of enhancer/protein complexes after inducing demethylation or inhibiting histone deacetylases. We show that transcription of a methylated and silent mouse M-lysozyme gene can be induced upon the inhibition of histone deacetylases in the absence of demethylation or in vivo transactivating factor binding to the enhancer. In contrast, DNA demethylation induces both gene activity as well as enhancer complex formation. Therefore, both mechanisms play a role in lysozyme gene repression mediated by methylated DNA: (i) the enhancer cannot be loaded with transacting factors; and (ii) histone deacetylation inhibits transcription.