Hepatocyte transplantation holds great promise as an alternative to organ transplantation for the treatment of liver failure. In order to better understand the causes and potential barriers to treating liver failure from cirrhosis, we examined the extent to which organ function is affected in end-stage cirrhosis by damage to the native hepatocytes versus the abnormal environment in which they reside. We also examined the extent to which stem cells might play a role in functional recovery, and using microarray analysis, we identified HNF-4a expression as a critical factor in progressive hepatic dysfunction in cirrhosis. Rats treated with 14-16 weeks of CCL4 develop cirrhosis but have normal hepatic function, whereas animals treated with 26-28 weeks of CCL4 develop progressive liver dysfunction and die of liver failure approximately 6 weeks after receiving their last dose of CCL4. Primary hepatocytes derived from livers with advanced cirrhosis and compensated function maintain metabolic activity and the ability to secrete liver-specific proteins, whereas hepatocytes derived from cirrhotic livers with decompensated function fail to maintain metabolic or secretory activity. HNF4a expression is significantly decreased in liver tissue and in isolated hepatocytes from the animals with decompensated function. Cells from cirrhotic and control livers engraft equally well, but those from animals with cirrhosis and failing livers show little initial evidence of proliferative capacity or function. Both capacities, however, recover more than 2 months after transplantation, indicating that either mature hepatocytes or a subpopulation of adult stem cells are capable of full recovery in severe cirrhosis. More importantly, virus transduction to express HNF-4a in isolated hepatocytes from endstage cirrhotic rats resulted in a dramatic improvement in expression of liver-specific genes and liver function. When the virus encoding HNF-4a was given IV to cirrhotic animals with decompensated liver function, hepatic function improved and survival was prolonged. Thus, the state of the host microenvironment is critical for tissue regeneration and restoration of function. As exogenous activation of HNF-4a by viral transduction causes reversal of hepatocyte dysfunction in advanced cirrhosis, disruption of this signaling pathway appears to be the mechanism responsible for hepatic failure in cirrhosis, and targeting this pathway may be partially effective in treating patients with end-stage liver failure from cirrhosis.