Interferon gamma (IFN‐γ) inhibits in vitro the activation of hepatic stellate cells (HSC), the primary extracellular matrix‐producing cells in liver fibrosis. This study was undertaken to determine in vivo the effect of IFN‐γ in the rat model of liver fibrosis induced by dimethylnitrosamine (DMN), where HSC activation represents an early response to cell injury. Rats were killed after 1 or 3 weeks of treatment with DMN, IFN‐γ, DMN + IFN‐γ, or saline. Immunohistochemistry was used to identify proliferating (desmin‐ positive/bromodeoxyuridine (BrdU)‐positive cells) and activated (α‐ smooth‐muscle actin [α‐SMA]‐positive cells) HSCs. Collagen deposition was determined colorimetrically and by morphometry. The parenchymal extension of desmin‐ and actin‐positive cells and of fibrotic tissue was measured by point‐counting technique and expressed as a percentage of area. Western blot was used to determine laminin and fibronectin accumulation. The levels of messenger RNA (mRNA) for procollagen type I, fibronectin, and laminin were evaluated by Northern blot. No differences were observed in rats treated with either saline or IFN‐γ alone. IFN‐γ reduced HSC activation induced by liver injury, as shown by the decreased number of proliferating HSC and the reduction of parenchymal area occupied by α‐SMA‐positive cells observed in DMN + IFN‐γ‐treated animals compared with the DMN group. This was associated with reduced collagen, laminin, and fibronectin accumulation and lower levels of mRNA for procollagen type I, fibronectin, and laminin in the DMN + IFN‐γ group. Thus, this study indicates that IFN‐γ reduces extracellular matrix deposition in vivo by inhibition of HSC activation.