We describe a novel Drosophila gene, dtl (Drosophila Tat-like), which encodes a 60-kDa protein with RNA binding activity and a methyltransferase (MTase) domain. Dtl has an essential role in Drosophila development. The homologs of DTL recently described include PIMT (peroxisome proliferator-activated receptor-interacting protein with a methyltransferase domain), an RNA-binding protein that interacts with and enhances the nuclear receptor coactivator function, and TGS1, the methyltransferase involved in the formation of the 2,2,7-trimethylguanosine (m3G) cap of non-coding small RNAs. DTL is expressed throughout all of the developmental stages of Drosophila. The dtl mRNA has two ORFs (uORF and dORF). The product of dORF is the 60-kDa PIMT/TGS1 homolog protein that is translated from an internal AUG located 538 bp downstream from the 5' end of the message. This product of dtl is responsible for the formation of the m3G cap of small RNAs of Drosophila. Trimethylguanosine synthase activity is essential in Drosophila. The deletion in the dORF or point mutation in the putative MTase active site results in a reduced pool of m3G cap-containing RNAs and lethality in the early pupa stage. The 5' region of the dtl message also has the coding capacity (uORF) for a 178 amino acid protein. For complete rescue of the lethal phenotype of dtl mutants, the presence of the entire dtl transcription unit is required. Transgenes that carry mutations within the uORF restore the MTase activity but result in only partial rescue of the lethal phenotype. Interestingly, two transgenes bearing a mutation in uORF or dORF in trans can result in complete rescue.