Increasing evidence suggests that liver regeneration is suppressed in patients with chronic HCV infection; however, the underlying mechanisms remain unclear. Previously, we demonstrated that injection of the synthetic double‐stranded RNA (dsRNA) poly I:C to mimic viral infection suppresses liver regeneration in the partial hepatectomy (PHx) model, whereby IFN‐γ contributes to the inhibition. In this study, we examined the role of the IFN‐γ‐activated downstream signal (STAT1) and genes (IRF‐1, p21^cip1, and SOCS1) in liver regeneration and hepatocyte proliferation. Results show that disruption of the STAT1 gene abolished poly I:C suppression of liver regeneration and the inhibitory effect of poly I:C on liver regeneration was diminished in IRF‐1^−/− and p21^cip1‐/‐mice. Treatment with IFN‐γ in vitro inhibited cell proliferation of wild‐type mouse hepatocytes, but not STAT1^−/− hepatocytes. The inhibitory effect of IFN‐γ on cell proliferation was also diminished in IRF‐1^−/− and p21^cip1−/− hepatocytes, but enhanced in SOCS1^−/− hepatocytes. Hepatocyte proliferation was unaffected by treatment with poly I:C alone, but when hepatocytes were co‐cultured with liver lymphocytes, proliferation was inhibited by IFN‐γ/STAT1‐dependent mechanisms. Moreover, in HCV‐infected livers with cirrhosis, activation of STAT1 was detected and correlated positively with liver injury (elevated serum levels of AST) but negatively with hepatocyte proliferation (hepatocyte PCNA and Ki‐67 positive immunostaining). In conclusion, STAT1 is involved in dsRNA suppression of liver regeneration; not only does STAT1 activation contribute to liver injury, it may also block liver repair through inhibition of hepatocyte proliferation in HCV‐infected patients, playing an important role in the pathogenesis of disease. (HEPATOLOGY 2006;44:955–966.)