Hepatic steatosis may have a generally benign prognosis, either because most hepatocytes are not significantly injured or mechanisms to replace damaged hepatocytes are induced. To determine the relative importance of these mechanisms, we compared hepatocyte damage and replication in ethanol‐fed and ob/ob mice with very indolent fatty liver disease to that of healthy control mice and PARP‐1^‐/‐ mice with targeted disruption of the DNA repair enzyme, poly(ADP‐ribose) polymerase. Compared to the healthy controls, both groups with fatty livers had significantly higher serum alanine aminotransferase values, hepatic mitochondrial H₂O₂ production, and hepatocyte oxidative DNA damage. A significantly smaller proportion of the hepatocytes from fatty livers entered S phase when cultured with mitogens. Moreover, this replicative senescence was not reversed by treating cultured hepatocytes with agents (i.e., betaine or leptin) that improve liver disease in intact ethanol‐fed or leptin‐deficient mice. Hepatocytes from PARP1^‐/‐ mice also had more DNA damage and reduced DNA synthesis in response to mitogens. However, neither mice with fatty livers nor PARP‐1‐deficient mice had atrophic livers. All of the mice with senescent mature hepatocytes exhibited hepatic accumulation of liver progenitor (oval) cells and oval cell numbers increased with the demand for hepatocyte replacement. Therefore, although hepatic oxidant production and damage are generally increased in fatty livers, expansion of hepatic progenitor cell populations helps to compensate for the increased turnover of damaged mature hepatocytes. In conclusion, these results demonstrate that induction of mechanisms to replace damaged hepatocytes is important for limiting the progression of fatty liver disease. (HEPATOLOGY 2004;39:403–411.)