The relation of CpG methylation to gene silencing is well established, but the contribution of DNA demethylation to gene expression during cell differentiation remains unclear. We show that the IL-4 locus undergoes a complex series of methylation and demethylation steps during T helper cell differentiation. The 5' region of the IL-4 locus is hypermethylated in naive T cells and becomes specifically demethylated in Th2 cells, whereas a highly conserved DNase I-hypersensitive region at the 3' end shows the converse behavior, being hypomethylated in naive T cells and becoming methylated during Th1 differentiation. 5' demethylation is not required for chromatin remodeling or primary transcription of the IL-4 gene but is strongly associated with efficient, high-level induction of IL-4 transcripts by differentiated Th2 cells.