Short hairpin RNA (shRNA)-induced RNAi is used for biological discovery and therapeutics. Dicer, whose normal role is to liberate endogenous miRNAs from their precursors, processes shRNAs into different biologically active siRNAs, affecting their efficacy and potential for off-targeting. We found that, in cells, Dicer induced imprecise cleavage events around the expected sites based on the previously described 5′/3′ counting rules. These promiscuous noncanonical cleavages were abrogated when the cleavage site was positioned 2 nt from a bulge or loop. Interestingly, we observed that the ∼1/3 of mammalian endogenous pre-miRNAs that contained such structures were more precisely processed by Dicer. Implementing a "loop-counting rule," we designed potent anti-HCV shRNAs with substantially reduced off-target effects. Our results suggest that Dicer recognizes the loop/bulge structure in addition to the ends of shRNAs/pre-miRNAs for accurate processing. This has important implications for both miRNA processing and future design of shRNAs for RNAi-based genetic screens and therapies.