Measles virus (MV) lacking expression of C protein (C(KO)) is a potent activator of the double-stranded RNA (dsRNA)-dependent protein kinase (PKR), whereas the isogenic parental virus expressing C protein is not. Here, we demonstrate that significant amounts of dsRNA accumulate during C(KO) mutant infection but not following parental virus infection. dsRNA accumulated during late stages of infection and localized with virus replication sites containing N and P proteins. PKR autophosphorylation and stress granule formation correlated with the timing of dsRNA appearance. Phospho-PKR localized to dsRNA-containing structures as revealed by immunofluorescence. Production of dsRNA was sensitive to cycloheximide but resistant to actinomycin D, suggesting that dsRNA is a viral product. Quantitative PCR (qPCR) analyses revealed reduced viral RNA synthesis and a steepened transcription gradient in C(KO) virus-infected cells compared to those in parental virus-infected cells. The observed alterations were further reflected in lower viral protein expression levels and reduced C(KO) virus infectious yield. RNA deep sequencing confirmed the viral RNA expression profile differences seen by qPCR between C(KO) mutant and parental viruses. After one subsequent passage of the C(KO) virus, defective interfering RNA (DI-RNA) with a duplex structure was obtained that was not seen with the parental virus. We conclude that in the absence of C protein, the amount of PKR activator RNA, including DI-RNA, is increased, thereby triggering innate immune responses leading to impaired MV growth.