Acute hyperglycemia normally suppresses hepatic glucose production (HGP) and gluconeogenic gene expression. Conversely, chronic hyperglycemia is accompanied by progressive increases in basal HGP and is a major contributor to hyperglycemia in both type 1 and type 2 diabetes by mechanisms that are poorly understood. The aim of this study was to investigate the molecular mechanisms whereby hyperglycemia contributes to excessive gluconeogenesis in Fao hepatoma cells. Increasing glucose from 5 to 20 mmol/l resulted in loss of glucose inhibition of PEPCK gene expression after 12 h. Furthermore, 24 h of incubation with 20 mmol/l glucose increased cAMP-stimulated PEPCK mRNA by approximately 40% (P < 0.05) and similarly increased glucose production. Although total CCAAT/enhancer-binding protein beta (C/EBPbeta) protein levels were suppressed, 20 mmol/l glucose increased the liver activating protein (LAP; an active isoform of C/EBPbeta)/liver inhibitory protein (LIP; an inhibitory isoform of C/EBPbeta) ratio significantly. Chromatin immunoprecipitation studies of the endogenous PEPCK gene demonstrated an increased association of LAP with the cAMP response element of the promoter. Using transient transfection to manipulate the LAP/LIP ratio, we also demonstrate a direct relationship between this ratio and PEPCK promoter activity. An increased LAP/LIP ratio not only enhanced cAMP- and dexamethasone-induced PEPCK gene expression but also impaired the repressive effect of insulin. These results demonstrate that sustained hyperglycemia diminishes the inhibitory effect of glucose and insulin on PEPCK expression and enhances hormone-stimulated PEPCK gene expression and hepatocellular glucose production. Because prolonged hyperglycemia increases the LAP/LIP ratio and can potentiate hormone induction of PEPCK transcription, our results suggest that a hyperglycemia-driven increased LAP/LIP ratio may be a critical molecular event in the pathogenesis of increased HGP in diabetes.