Approximately 50% of patients with chronic hepatitis C (CHC) have ongoing expression of interferon stimulated genes (ISGs) in the liver. It is unclear why this endogenous antiviral response is inefficient in eradicating the infection. Several viral escape strategies have been identified in vitro, including inhibition of interferon (IFN) induction and ISG messenger RNA (mRNA) translation. The in vivo relevance of these mechanisms is unknown, because reliable methods to identify hepatitis C virus (HCV)-infected cells in human liver are lacking. We developed a highly sensitive in situ hybridization (ISH) system capable of HCV RNA and ISG mRNA detection in human liver biopsies and applied it to study the interaction of HCV with the endogenous IFN system. We simultaneously monitored HCV RNA and ISG mRNA using HCV isolate- and ISG mRNA-specific probes in liver biopsy sections from 18 CHC patients. The signals were quantified at the single-cell resolution in a series of random high-power fields. The proportion of infected hepatocytes ranged from 1%-54% and correlated with viral load, but not with HCV genotype or ISG expression. Infected cells occurred in clusters, pointing to cell-to-cell spread as the predominant mode of HCV transmission. ISG mRNAs were readily detected in HCV-infected cells, challenging previously proposed mechanisms of viral interference with the immune system. Conversely, infected cells and neighboring cells showed increased ISG mRNA levels, demonstrating that the stimulus driving ISG expression originates from HCV-infected hepatocytes. HCV infection in human hepatocytes during CHC does not efficiently interfere with IFN induction, IFN signaling, or transcription of ISG mRNA.