The leader RNA transcript of vesicular stomatitis virus inhibits transcription of the adenovirus major late promoter and virus-associated genes in a soluble HeLa cell transcription system. We examined the specific nucleotide sequence involved and the potential role of leader-protein interactions in this inhibition of RNA polymerase II- and III-directed transcription. Using synthetic oligodeoxynucleotides homologous to regions of the leader RNA molecule, we extend our previous results (B.W. Grinnell and R.R. Wagner, Cell 36:533-543, 1984) that suggest a role for the AU-rich region of the leader RNA or the homologous AT region of a cloned cDNA leader in the inhibition of DNA-dependent transcription. Our results indicate that a short nucleotide sequence (AUUAUUA) or its deoxynucleotide homolog (ATTATTA) appears to be the minimal requirement for the leader RNA to inhibit transcription by both RNA polymerases, but sequences flanking both sides of this region increase the inhibitory activity. Nucleotide changes in the homologous AT-rich region drastically decrease the transcriptional inhibitory activity. Leader RNAs from wild-type virus, but not from a 5'-defective interfering particle, form a ribonuclease-resistant, protease-sensitive ribonucleoprotein complex in the soluble HeLa cell extract. Several lines of evidence suggest that the leader RNA specifically interacts with a 65,000-dalton (65K) cellular protein. In a fractionated cell extract, only those fractions containing this 65K protein could reverse the inhibition of DNA-dependent RNA synthesis by the plus-strand vesicular stomatitis virus leader RNA or by homologous DNA. In studies with synthetic oligodeoxynucleotides homologous to leader RNA sequences, only those oligonucleotides containing the inhibitory sequence were able to bind to a gradient fraction containing the 65K protein.