RNA silencing is a conserved mechanism in which small RNAs trigger various forms of sequence-specific gene silencing by guiding Argonaute complexes to target RNAs by means of base pairing. RNA silencing is thought to have evolved as a form of nucleic-acid-based immunity to inactivate viruses and transposable elements. Although the activity of transposable elements in animals has been thought largely to be restricted to the germ line, recent studies have shown that they may also actively transpose in somatic cells, creating somatic mosaicism in animals. In the Drosophila germ line, Piwi-interacting RNAs arise from repetitive intergenic elements including retrotransposons by a Dicer-independent pathway and function through the Piwi subfamily of Argonautes to ensure silencing of retrotransposons. Here we show that, in cultured Drosophila S2 cells, Argonaute 2 (AGO2), an AGO subfamily member of Argonautes, associates with endogenous small RNAs of 20-22 nucleotides in length, which we have collectively named endogenous short interfering RNAs (esiRNAs). esiRNAs can be divided into two groups: one that mainly corresponds to a subset of retrotransposons, and the other that arises from stem-loop structures. esiRNAs are produced in a Dicer-2-dependent manner from distinctive genomic loci, are modified at their 3' ends and can direct AGO2 to cleave target RNAs. Mutations in Dicer-2 caused an increase in retrotransposon transcripts. Together, our findings indicate that different types of small RNAs and Argonautes are used to repress retrotransposons in germline and somatic cells in Drosophila.