Genetic mouse studies suggest that the NF-κB pathway regulator NEMO (also known as IKKγ) controls chronic inflammation and carcinogenesis in the liver. However the molecular mechanisms explaining the function of NEMO are not well defined. Here we report that overexpression of the cell cycle regulator p21 is a critical feature of liver inflammation and carcinogenesis caused by the loss of NEMO. NEMOΔhepa mice develop chronic hepatitis characterized by increased hepatocyte apoptosis and proliferation that causes the development of fibrosis and hepatocellular carcinoma, similar to the situation in human liver disease. Having identified p21 overexpression in this model, we evaluated its role in disease progression and LPS-mediated liver injury in double mutant NEMOΔhepa/p21-/- mice. Eight week-old NEMOΔhepa/p21-/- animals displayed accelerated liver damage that was not associated with alterations in cell cycle progression or the inflammatory response. However, livers from NEMOΔhepa/p21-/- mice displayed more severe DNA damage that was further characterized by LPS administration correlating with higher lethality of the animals. This phenotype was attenuated by genetic ablation of the TNF receptor TNF-R1 in NEMOΔhepa/p21-/- mice, demonstrating that DNA damage is induced via TNF. One year old NEMOΔhepa/p21-/- mice displayed greater numbers of hepatocellular carcinoma and severe cholestasis compared to NEMOΔhepa animals. Therefore, p21 overexpression in NEMOΔhepa animals protects against DNA damage, acceleration of hepatocarcinogenesis and cholestasis. Taken together, our findings illustrate how loss of NEMO promotes chronic liver inflammation and carcinogenesis, and they identify a novel protective role for p21 against the generation of DNA damage.