Dramatic DNA reorganization and elimination processes occur during macronuclear differentiation in ciliates. In this study we analyzed whether cytosine methylation of specific sequences plays a functional role during DNA rearrangement. Three classes of sequences, macronuclear-destined sequences (MDSs, pCE7), members from a large family of transposon-like elements and micronuclear-specific sequences (pLJ01), differing in their structure and future destiny during nuclear differentiation, were studied in the micronucleus, the developing macronucleus and, when present, in the mature macronucleus. While the MDSs become processed to a 1.1 and 1.3 kb gene-sized macronuclear DNA molecule, the family of transposon-like elements represented by MaA81 becomes removed late in the course of polytene chromosome formation. The micronuclear-specific sequence pLJ01 is eliminated together with bulk micronuclear DNA during degradation of polytene chromosomes. No methylated cytosine could be detected in the vegetative macronucleus and no difference in methylation pattern was observed either between micronucleus and developing macronucleus in MDSs or in a micronuclear-specific sequence. However, a significant percentage of the cytosines contained in the transposon-like element becomes methylated de novo in the course of macronuclear differentiation. This is the first demonstration that cytosine methylation in specific sequences occurs during macronuclear differentiation and may provide a first step towards understanding epigenetic factors involved in DNA processing.