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Methylation of two GATC sites (GATC1028 and GATC1130) within the pap regulatory region is differentially inhibited in phase ON and phase OFF cells. The GATC1028 site of phase ON cells is non-methylated and the GATC1130 site is fully methylated. Conversely, in phase OFF cells the GATC1028 site is fully methylated whereas the GATC1130 site is non-methylated. Two transcriptional activators, PapI and Lrp (leucine-responsive regulatory protein), are required for this specific methylation inhibition. DNA footprint analysis using non-methylated pap DNAs indicates that Lrp binds to a region surrounding the GATC1130 site, whereas PapI does not appear to bind to pap regulatory DNA. However, addition of Lrp and PapI together results in an additional DNaseI footprint around the GATC1028 site. Moreover, Dam methylation inhibits binding of Lrp/PapI near the GATC1028 site and alters binding of Lrp at the GATC1130 site. Our results support a model in which Dam and Lrp/PapI compete for binding near the GATC1028 site, regulating the methylation state of this GATC site and, consequently, the pap transcription state. 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