Cystic sebaceous tumors (CST) are well-circumscribed, large, deeply located dermal sebaceous proliferations with a cystic growth pattern. We identified 12 CST in 8 of 19 patients with Muir-Torre syndrome (MTS). We interpret CST as a tumor spectrum with clearly benign cystic sebaceous adenomas at one end and proliferative atypical cystic sebaceous tumors at the other. When examining these proliferative atypical tumors on morphologic criteria alone, the possibility of an evolving cystic sebaceous carcinoma cannot be excluded. We have not observed recurrences or metastases, indicating that these lesions are not highly malignant carcinomas. In 10 of 12 cases of CST, we examined microsatellite instability (MSI). All 10 examined examples of CST from patients with MTS showed MSI characteristic for hereditary nonpolyposis colorectal cancer (HNPCC), which is caused by autosomal dominant inherited DNA mismatch repair (MMR) defects. Mutational analysis of the MMR genes hMSH2 and hMLH1 had revealed different germline mutations in the hMSH2 gene in three of six examined patients with MTS with CST. We then found four more CST in patients without a history of internal malignancy. All four CST exhibited MSI. By mutational analysis in one of these patients we identified a truncating germline mutation in the MMR gene hMLH1. We conclude that CST is a marker for the mismatch repair-deficient subtype of MTS with a high risk for later internal malignancies. By recognizing CST, the histopathologist can suggest the great likelihood of MTS to the clinician.