Although income inequality in Central and Eastern Europe was considerably lower during socialism than in other countries at comparable levels of development, it increased significantly in all Central and East European states after the fall of communist regimes. However, some of these countries managed to maintain comparatively low inequality levels 10 years into the transition period while inequalities have skyrocketed in others. What explains this variation? This article presents one of the first longitudinal cross-national analyses of the factors that determine changes in income inequality in 10 Central and East European countries during the first decade after 1989. Results suggest that rising income inequality is principally related to (1. the expansion of the private sector, (2. retrenchment of the redistributive state, (3. the social exclusion of ethno-national minorities, and (4. penetration of foreign capital. Moreover, the analyses suggest that privatization strategies promoting foreign investment created more inequality than those promoting domestic investment. These findings reveal the social, political and cultural foundations of the income inequality dynamic during post-socialist transition in Central and Eastern Europe. (Contains 3 tables, 2 figures and 7 notes.)