Reversible transcriptional silencing of genes located near telomeres, termed the telomere position effect (TPE), is well characterized in Saccharomyces cerevisiae. TPE has also been observed in human tumor cell lines, but its function remains unknown. To investigate TPE in normal mammalian cells, we developed clones of mouse embryonic stem (ES) cells that contain single-copy marker genes integrated adjacent to different telomeres. Analysis of these telomeric transgenes demonstrated that they were expressed at very low levels compared to the same transgenes integrated at interstitial sites. Similar to the situation in yeast, but in contrast to studies with human tumor cell lines, TPE in mouse ES cells was not reversed with trichostatin A. Prolonged culturing without selection resulted in extensive DNA methylation and complete silencing of telomeric transgenes, which could be reversed by treatment with 5-azacytidine. Thus, complete silencing of the telomeric transgenes appears to involve a two-step process in which the initial repression is reinforced by DNA methylation. Extensive methylation of the telomeric transgenes was also observed in various tissues and embryonic fibroblasts isolated from transgenic mice. In contrast, telomeric transgenes were not silenced in ES cell lines isolated from 3-day-old preimplantation embryos, consistent with the hypothesis that TPE plays a role in the development of the embryo.