Adeno-associated virus (AAV)-mediated RNA interference shows promise as a therapy for chronic hepatitis B virus (HBV) infection, but its low efficacy and hepatotoxicity pose major challenges. We have generated AAV vectors containing different promoters and a panel of HBV-specific short hairpin RNAs (shRNAs) to investigate factors that contribute to the efficacy and pathogenesis of AAV-mediated RNA interference. HBV transgenic mice injected with high doses of AAV vectors containing the U6 promoter produced abundant shRNAs, transiently inhibited HBV, but induced severe hepatotoxicity. Sustained HBV suppression without liver toxicity can be achieved by lowering the dose of AAV-U6 vectors. AAVs containing the weaker H1 promoter did not cause liver injury, but their therapeutic efficacy was highly dependent on the sequence of the shRNA. Mice treated with the toxic U6-promoter-driven shRNA showed little change in hepatic microRNA levels, but a dramatic increase in hepatic leukocytes and inflammatory cytokines and chemokines. Hepatotoxicity was completely absent in immunodeficient mice and significantly alleviated in wild-type mice depleted of macrophages and granulocytes, suggesting that host inflammatory responses are the major cause of liver injury induced by the overexpressed shRNAs from AAV-U6 vectors. Our results demonstrate that selection of a highly potent shRNA and control its expression level is critical to achieve sustained HBV suppression without inducing inflammatory side effects.