A critical step during human microRNA maturation is the processing of the primary microRNA transcript by the nuclear RNaseIII enzyme Drosha to generate the approximately 60-nucleotide precursor microRNA hairpin. How Drosha recognizes primary RNA substrates and selects its cleavage sites has remained a mystery, especially given that the known targets for Drosha processing show no discernable sequence homology. Here, we show that human Drosha selectively cleaves RNA hairpins bearing a large (>/=10 nucleotides) terminal loop. From the junction of the loop and the adjacent stem, Drosha then cleaves approximately two helical RNA turns into the stem to produce the precursor microRNA. Beyond the precursor microRNA cleavage sites, approximately one helix turn of stem extension is also essential for efficient processing. While the sites of Drosha cleavage are determined largely by the distance from the terminal loop, variations in stem structure and sequence around the cleavage site can fine-tune the actual cleavage sites chosen.