Hepatocellular carcinoma (HCC) generally occurs in the presence of chronic liver injury, often as a sequela of liver fibrosis. Hepatic progenitor cells (HPCs) are known to be capable of forming both hepatocytes and cholangiocytes in chronic liver injury, which are also considered a source of myofibroblasts and tumor-initiating cells, under carcinogenic circumstances. However, the underlying mechanisms that activate HPCs to give rise to HCC are still unclear. In current study, the correlation between HPCs activation and liver fibrosis and carcinogenesis was investigated in rats and human specimens. We analyzed the role of HPCs in tumorigenesis, by transplanting exogenous HPCs in a diethylnitrosamine-induced rat HCC model. Our data indicated that HPC activation correlated with hepatic fibrosis and hepatocarcinogenesis. We further found that exogenous HPC infusion promoted liver fibrosis and hepatocarcinogenesis, while lipopolysaccharides (LPS) played an important role in this process. However, results of our study indicated that LPS did not induce HPCs to form tumor in nude mice directly. Rather, LPS induced myofibroblast-like morphology in HPCs, which enhanced the tumorigenic potential of HPCs. Further experiments showed that LPS/Toll-like receptor 4 (TLR4) signaling mediated the differentiation of HPCs into myofibroblasts and enhanced the production of interleukin-6 (IL-6) and tumor necrosis factor-α (TNF-α), which led to the aberrant expression of Ras and p53 signaling pathways in HPCs, and finally, promoted the proliferation and malignant transformation of HPCs, by long non-coding RNA regulation. Besides, examination of HCC clinical samples demonstrated that IL-6 and TNF-α production correlated with HPC activation, hepatic fibrosis, and HCC recurrence. Our study indicates that both myofibroblasts and tumor cells are derived from HPCs. HPC-derived myofibroblasts create tumor microenvironment and contribute to the proliferation and malignant transformation of HPCs. Furthermore, LPS present in the chronic liver inflammation microenvironment might play an important role in hepatocarcinogenesis, by regulating the plastic potential of HPCs.