The role of DNA methylation in the regulation of catabolic genes such as MMP13 and IL1B, which have sparse CpG islands, is poorly understood in the context of musculoskeletal diseases. We report that demethylation of specific CpG sites at -110 bp and -299 bp of the proximal MMP13 and IL1B promoters, respectively, detected by in situ methylation analysis of chondrocytes obtained directly from human cartilage, strongly correlated with higher levels of gene expression. The methylation status of these sites had a significant impact on promoter activities in chondrocytes, as revealed in transfection experiments with site-directed CpG mutants in a CpG-free luciferase reporter. Methylation of the -110 and -299 CpG sites, which reside within a hypoxia-inducible factor (HIF) consensus motif in the respective MMP13 and IL1B promoters, produced the most marked suppression of their transcriptional activities. Methylation of the -110 bp CpG site in the MMP13 promoter inhibited its HIF-2α-driven transactivation and decreased HIF-2α binding to the MMP13 proximal promoter in chromatin immunoprecipitation assays. In contrast to HIF-2α, MMP13 transcriptional regulation by other positive (RUNX2, AP-1, ELF3) and negative (Sp1, GATA1, and USF1) factors was not affected by methylation status. However, unlike the MMP13 promoter, IL1B was not susceptible to HIF-2α transactivation, indicating that the -299 CpG site in the IL1B promoter must interact with other transcription factors to modulate IL1B transcriptional activity. Taken together, our data reveal that the methylation of different CpG sites in the proximal promoters of the human MMP13 and IL1B genes modulates their transcription by distinct mechanisms.