The terminal protein domain of the hepatitis B viral polymerase can inhibit the cellular response to interferon. To clarify the clinical relevance of this inhibitory effect, we examined the expression of terminal protein in liver biopsy specimens from patients with chronic hepatitis B infection. We found that expression of terminal protein is associated with a failure of hepatocytes to respond to interferon, as assessed by expression of the interferon-inducible protein beta 2-microglobulin. Patients whose liver specimens contained large numbers of cells expressing terminal protein tended not to respond to treatment. During interferon therapy the percentage of cells expressing terminal protein remained constant, but treatment significantly reduced the number of cells that expressed the hepatitis B nucleocapsid protein. Hence expression of terminal protein in a cell may prevent elimination of the virus by interferon therapy.