HCV persistently infects the majority of patients exposed to it and can cause irreversible fibrosis, leading to the onerous clinical sequelae of cirrhosis. In this Review, we discuss the direct effects of HCV on hepatocytes and the role of the immune system in liver damage. HCV, like many viruses, has developed methods by which to subvert host innate and adaptive immune responses to infection. HCV proteins seem to modulate apoptosis and steatosis, ultimately leading to hepatic stellate cell activation, fibrosis and hepatocellular carcinoma. In addition, HCV manipulates the immune system, disrupting both innate and adaptive immunity to establish persistent infection. The immune system initially attempts to eradicate the virus, but, in the setting of chronic infection, probably promotes hepatocyte damage and fibrosis through direct cellular toxicity and the release of inflammatory cytokines. Multiple types of cytotoxic lymphocytes, comprising the unique immune hepatic microenvironment, are likely to be important in the pathogenesis of HCV-induced liver damage. The net liver damage from HCV infection depends on the balance between the host's antiviral mechanisms and the virus' ability to subvert them.