Cholesterol 7 alpha-hydroxylase (7 alpha-hydroxylase) is the rate-limiting enzyme in bile acid biosynthesis. It is subject to a feedback control, whereby high levels of bile acids suppress its activity, and cholesterol exerts a positive control. It has been suggested that posttranscriptional control plays a major part in that regulation. We have studied the mechanisms by which cholesterol and bile acids regulate expression of the 7 alpha-hydroxylase gene and found it to be solely at the transcriptional level by using two different approaches. First, using a tissue culture system, we localized a liver-specific enhancer located 7 kb upstream of the transcriptional initiation site. We also showed that low-density lipoprotein mediates transcriptional activation of chimeric genes, containing either the 7 alpha-hydroxylase or the albumin enhancer in front of the 7 alpha-hydroxylase proximal promoter, to the same extent as the in vivo cholesterol-mediated regulation of 7 alpha-hydroxylase mRNA. In a second approach, using transgenic mice, we have found that expression of an albumin enhancer-7 alpha-hydroxylase-lacZ fusion gene is restricted to the liver and is regulated by cholesterol and bile acids in a manner quantitatively similar to that of the endogenous gene. We also found, that a liver-specific enhancer is necessary for expression of the rat 7 alpha-hydroxylase gene, in agreement with the tissue culture experiments. Together, these results demonstrate that cholesterol and bile acids regulate the expression of the 7 alpha-hydroxylase gene solely at the transcriptional level.