Influenza virus mRNAs are synthesized by the trimeric viral polymerase using short capped primers obtained by a 'cap-snatching' mechanism. The polymerase PB2 subunit binds the 5' cap of host pre-mRNAs, which are cleaved after 10-13 nucleotides by the PB1 subunit. Using a library-screening method, we identified an independently folded domain of PB2 that has specific cap binding activity. The X-ray structure of the domain with bound cap analog m(7)GTP at 2.3-A resolution reveals a previously unknown fold and a mode of ligand binding that is similar to, but distinct from, other cap binding proteins. Binding and functional studies with point mutants confirm that the identified site is essential for cap binding in vitro and cap-dependent transcription in vivo by the trimeric polymerase complex. These findings clarify the nature of the cap binding site in PB2 and will allow efficient structure-based design of new anti-influenza compounds inhibiting viral transcription.