In recent studies using freshly isolated rat cholangiocytes, we established that water crosses the cholangiocyte membrane by a channel-mediated mechanism involving aquaporins, a family of water-channel proteins. Our goal was to address the importance of channel-mediated water transport in ductal bile formation by employing a physiologic experimental model, the enclosed, polarized rat intrahepatic bile duct unit (IBDU). Expansion and reduction of luminal areas as a reflection of water movement into and out of IBDUs prepared from livers of normal rats were measured by quantitative computer-assisted image analysis. When enclosed IBDUs were exposed to inward or outward osmotic gradients, their luminal area rapidly increased (approximately 25%) or decreased (approximately 20%) reflecting net water secretion or absorption, respectively. These effects were specifically inhibited by 2 water channel blockers, DMSO and HgCl2. In both instances, beta-mercaptoethanol reversed the inhibitory effects. In the absence of an osmotic gradient, choleretic agents (secretin and forskolin) and a cholestatic hormone (somatostatin) induced a significant increase or decrease of IBDU luminal area by 21% and 22%, respectively. These effects were also inhibited by DMSO and reversed by beta-mercaptoethanol. Under our experimental conditions, DMSO did not interfere with either forskolin-induced cAMP synthesis or the generation of osmotic driving forces via the apical chloride-bicarbonate exchanger. Protamine, an inhibitor of the paracellular pathway, had no effect on hypotonic or forskolin-induced water secretion in IBDUs. These results in a physiologically relevant model of ductal bile formation provide additional support for the concept that osmotically driven and agonist-stimulated water movement into (secretion) and out of (absorption) the biliary ductal lumen is transcellular and water channel-mediated.