A mutational approach was employed to identify sequence and structural elements in a ribonuclease III processing signal that are important for in vitro enzymatic cleavage reactivity and selectivity. The substrate analyzed was the bacteriophage T7 R1.1 processing signal, a 60 nucleotide irregular RNA hairpin exhibiting an upper and lower dsRNA stem, separated by an asymmetric internal loop which contains the scissile phosphodiester bond. Altering the length of either the upper or lower dsRNA segment in R1.1 RNA dose not change the site of RNase III cleavage. However, decreasing the size of either the upper or lower dsRNA segment causes a progressive inhibition of processing reactivity. Omitting monovalent salt from the reaction buffer promotes cleavage of otherwise unreactive R1.1 deletion mutants. Accurate processing is maintained with R1.1 variants containing specific point mutations, designed to disrupt Watson-Crick (WC) base-pairing in a conserved sequence element within the upper dsRNA stem. The internal loop is not required for processing reactivity, as RNase III can accurately and efficiently cleave R1.1 variants in which this structure is WC base-paired. Moreover, an additional cleavage site is utilized in these variants, which occurs opposite the canonical site, and is offset by two nucleotides. The fully base-paired R1.1 variants form a stable complex with RNase III in Mg(2+)-free buffer, which can be detected by a gel electrophoretic mobility shift assay. In contrast, the complex of wild-type R1.1 RNA with RNase III is unstable during nondenaturing gel electrophoresis. Thus, a functional role of the T7 R1.1 internal loop is to enforce single enzymatic cleavage, which occurs at the expense of RNase III binding affinity.