To investigate the mechanism of inclusion body formation and the effect of a hydrophobic sequence on the in vivo polypeptide folding, the aggregation caused by recombinant fusion beta-galactosidase in Escherichia coli was examined. Two plasmids were constructed: pTBG(H-) carried only the preS2 sequence of the hepatitis B virus surface antigen (HBsAg) in front of the beta-galactosidase gene (lacZ) while pTBG(H+) carried an additional sequence encoding the amino-terminal hydrophobic sequence of the S region of HBsAg between preS2 and lacZ. Unlike cells expressing the fusion protein not containing the hydrophobic sequence, E. coli JM109/pTBG(H+) exhibited temperature-sensitive production of beta-galactosidase. As the culture temperature increased the activity decreased dramatically. This decrease in activity was not due to a decrease in fusion polypeptide production, but rather the fusion polypeptides containing the hydrophobic sequence aggregated within the cells at high temperature. However once the fusion polypeptides folded into proper conformation at low temperature, they maintained the activity even at high temperature. The results indicate that aggregation is a consequence of incorrect folding and assembly of the polypeptides, and is not derived from the native structure. The aggregates of the pTBG(H+)-encoded fusion polypeptides did not revert to active form when the culture temperature was lowered.