The hepatocyte nuclear factor (HNF)4α, a member of the nuclear receptor superfamily, regulates genes that play a critical role in embryogenesis and metabolism. Recent studies have shown that mutations in the human HNF4α gene cause a rare form of type 2 diabetes, maturity onset diabetes of the young (MODY1). To investigate the properties of these naturally occurring HNF4α mutations we analysed five MODY1 mutations (R154X, R127W, V255M, Q268X and E276Q) and one other mutation (D69A), which we found in HepG2 hepatoma cells. Activation of reporter genes in transfection assays and DNA binding studies showed that the MODY1-associated mutations result in a variable reduction in function, whereas the D69A mutation showed an increased activity on some promoters. None of the MODY mutants acted in a dominant negative manner, thus excluding inactivation of the wild-type factor as a critical event in MODY development. A MODY3-associated mutation in the HNF1α gene, a well-known target gene of HNF4α, results in a dramatic loss of the HNF4 binding site in the promoter, indicating that mutations in the HNF4α gene might cause MODY through impaired HNF1α gene function. Based on these data we propose a two-hit model for MODY development.