Double-stranded RNA (dsRNA) directs the sequence-specific degradation of mRNA through a process known as RNA interference (RNAi). Using a recently developed Drosophila in vitro system, we examined the molecular mechanism underlying RNAi. We find that RNAi is ATP dependent yet uncoupled from mRNA translation. During the RNAi reaction, both strands of the dsRNA are processed to RNA segments 21–23 nucleotides in length. Processing of the dsRNA to the small RNA fragments does not require the targeted mRNA. The mRNA is cleaved only within the region of identity with the dsRNA. Cleavage occurs at sites 21–23 nucleotides apart, the same interval observed for the dsRNA itself, suggesting that the 21–23 nucleotide fragments from the dsRNA are guiding mRNA cleavage.