We have previously found that genes of the CFR:BI restriction-modification (R-M) system from Citrobacter freundii are oriented divergently and that their promoter regions overlap. The overlapping promoters suggest regulation of gene expression at the transcriptional level. In this study the transcription regulation of CFR:BI R-M genes was analyzed in vivo and in vitro in Escherichia coli. It was shown that in the presence of CFR:BI methyltransferase (M.CFR:BI), cell galactokinase activity decreases 10-fold when the galactokinase gene (galK) is under the control of the cfrBIM promoter and increases 20-fold when galK is under the control of the cfrBIR promoter. The CFR:BI site, proven to be unique for the entire CFR:BI R-M gene sequence, is located in the -35 cfrBIM promoter region and is in close vicinity of the -10 cfrBIR promoter region. A comparison of the cfrBIM and the cfrBIR promoter activities in the in vitro transcription system using methylated and unmethylated DNA fragments as templates demonstrated that the efficiency of CFR:BI R-M gene transcription is regulated by enzymatic modification at the N-4-position of cytosine bases of the CFR:BI site by M.CFR:BI. From the results of the in vivo and in vitro experiments we suggest a new model of gene expression regulation in type II R-M systems.