The liver-specific enhancer of the serum albumin gene contains an essential segment, designated eH, which binds the hepatocyte nuclear factor 3 alpha (HNF3 alpha) and ubiquitous nuclear factor 1/CCAAT transcription factor (NF1/CTF) proteins in tight apposition. We previously showed that activation of transcription by the eH site was correlated with an increase in intracellular HNF3 alpha levels during the in vitro differentiation of the hepatic cell line H2.35. We now show that transfection of an HNF3 alpha cDNA expression vector into dedifferentiated H2.35 cells is sufficient to induce transcription from the eH site. Mutational analysis of the enhancer demonstrates that NF1/CTF cooperates with HNF3 alpha to induce enhancer activity. However, when the eH site is removed from the context of the enhancer, NF1/CTF can inhibit transcriptional activation by HNF3 alpha. We conclude that the ternary complex of HNF3 alpha, NF1/CTF, and the eH site forms a novel, composite regulatory element that is sensitive to the local DNA sequence environment and suggest that the transcriptional stimulatory activity of NF1/CTF depends on its higher-order interactions with other proteins during hepatocyte differentiation.