Hepatitis B virus (HBV) transcribes coterminal mRNAs of 0.7 to 3.5 kb from the 3.2-kb covalently closed circular DNA, with the 2.1-kb RNA being most abundant. The 0.7-kb RNA produces HBx protein, a transcriptional transactivator, while the 3.5-kb pregenomic RNA (pgRNA) drives core and P protein translation as well as genome replication. The large (L) and small (S) envelope proteins are translated from the 2.4-kb and 2.1-kb RNAs, respectively, with the majority of the S protein being secreted as noninfectious subviral particles and detected as hepatitis B surface antigen (HBsAg). pgRNA transcription could inhibit transcription of subgenomic RNAs. The present study characterized naturally occurring in-frame deletions in the 3' preS1 region, which not only codes for L protein but also serves as the promoter for 2.1-kb RNA. The human hepatoma cell line Huh7 was transiently transfected with subgenomic expression constructs for envelope (and HBx) proteins, dimeric constructs, or constructs mimicking covalently closed circular DNA. The results confirmed lost 2.1-kb RNA transcription and HBsAg production from many deletion mutants, accompanied by increases in other (especially 2.4-kb) RNAs, intracellular HBx and core proteins, and replicative DNA but impaired virion and L protein secretion. The highest intracellular L protein levels were achieved by mutants that had residual S protein expression or retained the matrix domain in L protein. Site-directed mutagenesis of a high replicating deletion mutant suggested that increased HBx protein expression and blocked virion secretion both contributed to the high replication phenotype. Our findings could help explain why such deletions are selected at a late stage of chronic HBV infection and how they contribute to viral pathogenesis. Expression of hepatitis B e antigen (HBeAg) and overproduction of HBsAg by wild-type HBV are implicated in the induction of immune tolerance to achieve chronic infection. How HBV survives the subsequent immune clearance phase remains incompletely understood. Our previous characterization of core promoter mutations to reduce HBeAg production revealed the ability of the 3.5-kb pgRNA to diminish transcription of coterminal RNAs of 2.4 kb, 2.1 kb, and 0.7 kb. The later stage of chronic HBV infection often selects for in-frame deletions in the preS region. Here, we found that many 3' preS1 deletions prevented transcription of the 2.1-kb RNA for HBsAg production, which was often accompanied by increases in intracellular 3.5-, 0.7-, and especially 2.4-kb RNAs, HBx and core proteins, and replicative DNA but lost virion secretion. These findings established the biological consequences of preS1 deletions, thus shedding light on why they are selected and how they contribute to hepatocarcinogenesis.