Fluid-structure interaction analysis of liquid storage structures under earthquake loadings is carried out by modelling the contained liquid by displacement-based fluid elements. To remove spurious modes in the free vibration analysis, a combined usage of rotational penalty and mass projection is proposed in conjunction with the one-point reduced integration for a four-node fluid element. The performance of the fluid element is examined for several cases of the acoustic vibration of fluid in a rigid cavity and the sloshing in liquid storage structures. A procedure is also established for determining the required number of elements with rotational penalty, so that low frequency sloshing modes can be retained while the spurious modes can be removed in the free vibration analysis. Seismic analysis of rectangular liquid storage structures is carried out with a focus on the fluid-structure interaction including the effects of the wall flexibility and a submerged internal body. Comparison with the results obtained by the Eulerian approach using velocity potential shows that the present method gives good results. (C) 1997 Elsevier Science Ltd.