The nucleolytic activity of animal Argonaute proteins is deeply conserved, despite its having no obvious role in microRNA-directed gene regulation. In mice, Ago2 (also known as Eif2c2) is uniquely required for viability, and only this family member retains catalytic competence. To investigate the evolutionary pressure to conserve Argonaute enzymatic activity, we engineered a mouse with catalytically inactive Ago2 alleles. Homozygous mutants died shortly after birth with an obvious anaemia. Examination of microRNAs and their potential targets revealed a loss of miR-451, a small RNA important for erythropoiesis. Though this microRNA is processed by Drosha (also known as Rnasen), its maturation does not require Dicer. Instead, the pre-miRNA becomes loaded into Ago and is cleaved by the Ago catalytic centre to generate an intermediate 3' end, which is then further trimmed. Our findings link the conservation of Argonaute catalysis to a conserved mechanism of microRNA biogenesis that is important for vertebrate development.