Methylated DNA binding protein 2 (MBD2) binds methylated promoters and suppresses transcription in cis through recruitment of a chromatin modification repressor complex. We show here a new mechanism of action for MBD2: suppression of gene expression indirectly through activation of microRNA hsa-mir-496. Overexpression of MBD2 in breast epithelial cell line MCF-10A results in induced expression and demethylation of hsa-mir-496 while depletion of MBD2 in a human breast cancer cell lines MCF-7 and MDA-MB231 results in suppression of hsa-mir-496. Activation of hsa-mir-496 by MBD2 is associated with silencing of several of its target genes while depletion of MBD2 leads to induction of hsa-mir-496 target genes. Depletion of hsa-mir-496 by locked nucleic acid (LNA) antisense oligonucleotide leads to activation of these target genes in MBD2 overexpressing cells supporting that hsa-mir-496 is mediating in part the effects of MBD2 on gene expression. We demonstrate that MBD2 binds the promoter of hsa-mir-496 in MCF-10A, MCF-7 and MDA-MB-231 cells and that it activates an in vitromethylated hsa-mir-496 promoter driving a CG-less luciferase reporter in a transient transfection assay. The activation of hsa-mir-496 is associated with reduced methylation of the promoter. Taken together these results describe a novel cascade for gene regulation by DNA methylation whereby activation of a methylated microRNA by MBD2 that is associated with loss of methylation triggers repression of downstream targets.