The mechanisms for progressive fibrosis and exacerbation by steatosis in patients with chronic hepatitis C (HCV) are still unknown. We hypothesized that proliferative blockade in HCV‐infected and steatotic hepatocytes results in the default activation of hepatic progenitor cells (HPC), capable of differentiating into both biliary and hepatocyte lineages, and that the resultant ductular reaction promotes portal fibrosis. To study this concept, 115 liver biopsy specimens from subjects with HCV were scored for steatosis, inflammation, and fibrosis. Biliary epithelium and HPC were decorated by cytokeratin 7 immunoperoxidase, and the replicative state of hepatocytes was assessed by p21 and Ki‐67 immunohistochemistry. A ductular reaction at the portal interface was common. There was a highly significant correlation between the area of ductular reaction and fibrosis stage (r = 0.453, P < .0001), which remained independently associated after multivariate analysis. HPC numbers also correlated with fibrosis (r = 0.544, P < .0001) and the ductular area (r = 0.624, P < .0001). Moreover, steatosis correlated with greater HPC proliferation (r = 0.372, P = .0004) and ductular reaction (r = 0.374, P < .0001) but was not an obligate feature. Impaired hepatocyte replication by p21 expression was independently associated with HPC expansion (P = .002) and increased with the body mass index (P < .001) and lobular inflammation (P = .005). In conclusion, the strong correlation between portal fibrosis and a periportal ductular reaction with HPC expansion, the exacerbation by steatosis, and the associations with impaired hepatocyte replication suggest that an altered regeneration pathway drives the ductular reaction. We believe this triggers fibrosis at the portal tract interface. This may be a stereotyped response of importance in other chronic liver diseases. (HEPATOLOGY 2005;41:809–818.)