Studies on transgenic mice expressing immunoglobulins against self-antigens have shown that self-tolerance is maintained by active elimination (clonal deletion), functional inactivation (clonal anergy) of self-reactive B cells, or a combination of both. We have established and characterized a transgenic mouse line expressing an anti-erythrocyte autoantibody. In contrast to other autoantibody transgenic lines, about 50% of the animals of this transgenic line suffer from autoimmune disease, indicating a loss of self-tolerance. Here we show that peritoneal Ly-1 B cells (also known as B-1 cells) are responsible for this autoimmune disease in our transgenic mice. A few self-reactive Ly-1 B cells that have somehow escaped the deletion mechanism expand in the peritoneum because of the absence of self-antigen. These Ly-1 B cells are eliminated in vivo by apoptosis once exposed to self-antigen. On the basis of these results we propose a novel autoantibody production mechanism whereby self-reactive B cells sequestered in compartments free of self-antigens may survive, proliferate and be activated for generation of pathogenic autoantibodies in autoimmune diseases.