Phase variation is important in bacterial pathogenesis, since it generates antigenic variation for the evasion of immune responses and provides a strategy for quick adaptation to environmental changes. In this study, a Helicobacter pylori clone, designated MOD525, was identified that displayed phase-variable lacZ expression. The clone contained a transcriptional lacZ fusion in a putative type III DNA methyltransferase gene (mod, a homolog of the gene JHP1296 of strain J99), organized in an operon-like structure with a putative type III restriction endonuclease gene (res, a homolog of the gene JHP1297), located directly upstream of it. This putative type III restriction-modification system was common in H. pylori, as it was present in 15 out of 16 clinical isolates. Phase variation of the mod gene occurred at the transcriptional level both in clone MOD525 and in the parental H. pylori strain 1061. Further analysis showed that the res gene also displayed transcriptional phase variation and that it was cotranscribed with the mod gene. A homopollymeric cytosine tract (C tract) was present in the 5' coding region of the res gene. Length variation of this C tract caused the res open reading frame (ORF) to shift in and out of frame, switching the res gene on and off at the translational level. Surprisingly, the presence of an intact res ORF was positively correlated with active transcription of the downstream mod gene. Moreover, the C tract was required for the occurrence of transcriptional phase variation. Our finding that translation and transcription are linked during phase variation through slipped-strand mispairing is new for H. pylori.