Recurrent hepatitis C after liver transplantation remains a significant cause of graft loss and retransplantation. Although treatment of recurrent hepatitis C with interferon‐based regimens has become widely accepted as safe and can lead to sustained virologic clearance of hepatitis C virus (HCV) RNA, long‐term histologic improvement and the risk of precipitating graft rejection remain controversial. The present study is a retrospective evaluation of the clinical and histological consequences of treating recurrent hepatitis C with interferon‐based therapy in a selected group of liver transplant recipients. Twenty‐three liver transplant recipients with recurrent hepatitis C and histologic evidence of progressive fibrosis completed at least 6 months of interferon, 83% of whom received pegylated‐interferon α‐2b; only 4 tolerated ribavirin. Overall, 11 patients (48%) had undetectable HCV RNA at the end of 6 months of treatment. Of these patients, 3 remained HCV RNA–negative on maintenance interferon monotherapy for 33 months, and the other 8 (35%) completed treatment and remained HCV RNA–undetectable 24 weeks after discontinuation of interferon. Overall necroinflammatory activity in liver biopsies obtained 2 years after HCV RNA became undetectable decreased significantly (7.73 ± 2.37 vs. 5.64 ± 2.94 units before and after treatment, respectively; P = .016). However, 5 of these 11 patients had no histologic improvement in follow‐up liver histology. Liver biopsies in the 12 nonresponders demonstrated disease progression. Of the 23 patients treated with interferon, 8 (35%) had evidence of acute or chronic rejection on posttreatment liver biopsy, most of whom had no previous history of rejection (P < .01 for comparison of pretreatment and posttreatment prevalence of histologic rejection), and 2 experienced graft loss from chronic rejection, requiring retransplantation. In conclusion, interferon treatment of recurrent hepatitis C does not consistently improve histologic disease after virologic response, and it may increase the risk of allograft rejection. (Liver Transpl 2004;10:850–858.)