We studied the molecular mechanism of demethylation and its role in kappa chain gene regulation. Following transfection into B cell cultures, this gene undergoes regional demethylation in a process that is developmentally regulated in a lineage- and stage-specific manner. Although a germline V kappa promoter is not required for the demodification activity, a fragment containing the intronic kappa chain transcriptional enhancer and the nearby matrix attachment region is essential. In its natural location downstream to the J kappa 5 sequence, this element induces bidirectional demodification of plasmid constructs in a distance- and orientation-independent manner. When this enhancer is placed in an upstream position, however, the kappa gene remains modified and transcriptionally inactive, demonstrating that demethylation is required for kappa chain activation. These studies suggest that the kappa enhancer plays a dual role in regulating B cell differentiation by inducing demethylation and by promoting tissue-specific transcription.