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The hydrophilic bile acid ursodeoxycholic acid has recently been shown to reduce biochemical markers of both cholestasis and hepatocellular damage in patients with chronic liver diseases. The most compelling evidence available is for chronic cholestatic liver diseases, in particular primary biliary cirrhosis, primary sclerosing cholangitis, and cholestasis associated with cystic fibrosis. The effects may be less beneficial in patients with advanced liver disease from these conditions. Data from placebo controlled trials are now available in support of earlier uncontrolled observations, but it is not yet clear whether short term benefit results in an improvement in longterm prognosis. The mechanism of action of the compound seems to reside in its displacement of toxic hydrophobic bile acids from both the bile acid pool and hepatocellular membranes. There may be an independent effect on bile flow, which could be of particular importance in cystic fibrosis, and possibly an effect on the immune system. Ursodeoxycholic acid should now be regarded as occupying a central place in the medical management of chronic cholestatic liver diseases, in particular primary biliary cirrhosis, because it improves cholestasis and reduces hepatocellular damage and it is not toxic. Research should now be targeted on whether treatment with ursodeoxycholic acid, initiated early in cholestatic liver conditions, improves the long-term outcome.