We showed previously that CCAAT/enhancer binding protein alpha (C/EBP alpha), a tissue-specific transcription factor, is a candidate tumor suppressor in lung cancer. In the present study, we have performed a transcriptional profiling study of C/EBP alpha target genes using an inducible cell line system. This study led to the identification of hepatocyte nuclear factor 3beta (HNF3 beta), a transcription factor known to play a role in airway differentiation, as a downstream target of C/EBP alpha. We found down-regulation of HNF3 beta expression in a large proportion of lung cancer cell lines examined and identified two novel mutants of HNF3 beta, as well as hypermethylation of the HNF3 beta promoter. We also developed a tetracycline-inducible cell line model to study the cellular consequences of HNF3 beta expression. Conditional expression of HNF3 beta led to significant growth reduction, proliferation arrest, apoptosis, and loss of clonogenic ability, suggesting additionally that HNF3 beta is a novel tumor suppressor in lung cancer. This is the first study to show genetic abnormalities of lung-specific differentiation pathways in the development of lung cancer.