Background: Protein-DNA interaction constitutes a basic mechanism for the genetic regulation of target gene expression. Deciphering this mechanism has been a daunting task due to the difficulty in characterizing protein-bound DNA on a large scale. A powerful technique has recently emerged that couples chromatin immunoprecipitation (ChIP) with next-generation sequencing, (ChIP-Seq). This technique provides a direct survey of the cistrom of transcription factors and other chromatin-associated proteins. In order to realize the full potential of this technique, increasingly sophisticated statistical algorithms have been developed to analyze the massive amount of data generated by this method.Results: Here we introduce HPeak, a Hidden Markov model (HMM)-based Peak-finding algorithm for analyzing ChIP-Seq data to identify protein-interacting genomic regions. In contrast to the majority of available ChIP-Seq analysis software packages, HPeak is a model-based approach allowing for rigorous statistical inference. This approach enables HPeak to accurately infer genomic regions enriched with sequence reads by assuming realistic probability distributions, in conjunction with a novel weighting scheme on the sequencing read coverage.Conclusions: Using biologically relevant data collections, we found that HPeak showed a higher prevalence of the expected transcription factor binding motifs in ChIP-enriched sequences relative to the control sequences when compared to other currently available ChIP-Seq analysis approaches. Additionally, in comparison to the ChIP-chip assay, ChIP-Seq provides higher resolution along with improved sensitivity and specificity of binding site detection. Additional file and the HPeak program are freely available at http://www.sph.umich.edu/csg/qin/HPeak.