The Epstein-Barr Virus (EBV) latency C promoter (Cp) is the origin of transcripts for six viral proteins. The promoter is active in lymphoblastoid B-cell lines but silent in many EBV-associated tumors and tumor cell lines. In these latter cell lines, the viral episome is hypermethylated in the vicinity of this promoter. We show that in such a cell line (Rael, a Burkitt's lymphoma line), 5-azacytidine inhibits DNA methyltransferase, brings about demethylation of EBV genomes, activates Cp transcription, and induces the expression of EBNA-2. Investigation of the phenomenon demonstrates the importance of the methylation status of a particular CpG site for the regulation of the Cp: (i) genomic sequencing shows that this site is methylated when the Cp is inactive and is not methylated when the promoter is active; (ii) methylation or transition mutation at this site abolishes complex formation with a cellular binding activity (CBF2) as determined by electrophoretic mobility shift analyses, competition binding analyses, and DNase I footprinting; and (iii) a single C --> T transition mutation at this site is associated with a marked reduction (> 50-fold) of transcriptional activity in a reporter plasmid. Thus, the CBF2 binding activity is shown to be methylation sensitive and crucial to EBNA-2-mediated activation of the Cp.