The formation of DNA methylation patterns is one of the epigenetic events that underlie mammalian development. The Sphk1 CpG island is a target for tissue-dependent DNA methylation as well as a template for generating multiple subtypes. The number of mammalian non-coding RNA genes is rapidly expanding. In this study, we found endogenous antisense transcripts, Khps1 subtypes with different sizes (600-20,000 nt). A subtype, Khps1a, was a 1290-bp, non-coding, 5'-capped and 3'-polyadenylated RNA that originated from the CpG island and overlapped with a tissue-dependent differentially methylated region (T-DMR) of Sphk1. Intriguingly, overexpression of two fragments of Khps1 caused demethylation of CG sites in the T-DMR. Furthermore, this RNA-directed demethylation was associated with DNA methylation at three CC(A/T)GG sites in the T-DMR. The link between the RNA-directed CG demethylation and non-CG methylation provides a novel mechanism of epigenetic regulation and potential tool for epigenetic manipulation of mammalian cells. (C) 2004 Elsevier Inc. All rights reserved.