Escherichia coli-based artificial chromosomes have become important tools for physical mapping and sequencing in various genome projects. The lack of a general method to modify these large bacterial clones, however, has limited their utility in functional studies. We developed a simple method to modify bacterial artificial chromosomes directly in the recombination-deficient E. coli host strain by homologous recombination for in vivo studies. The IRES-LacZ marker gene was introduced into a 131 kb BAG containing the murine zinc finger gene, RU49. No rearrangements or deletions were detected in the modified BACs. Furthermore, transgenic mice were generated by pronuclear injection of the modified BAG, and germline transmission of the intact BAG has been obtained. Proper expression of the lacZ transgene in the brain has been observed, which could not be obtained with conventional transgenic constructs.