RNA (guanine-7-)methyltransferase, the enzyme responsible for methylating the 5' cap structure of eukaryotic mRNA, was isolated from extracts of Saccharomyces cerevisiae. The yeast enzyme catalyzed methyl group transfer from S-adenosyl-L-methionine to the guanosine base of capped, unmethylated poly(A). Cap methylation was stimulated by low concentrations of salt and was inhibited by S-adenosyl-L-homocysteine, a presumptive product of the reaction, but not by S-adenosyl-D-homocysteine. The methyltransferase sedimented in a glycerol gradient as a single discrete component of 3.2S. A likely candidate for the gene encoding yeast cap methyltransferase was singled out on phylogenetic grounds. The ABD1 gene, located on yeast chromosome II, encodes a 436-amino-acid (50-kDa) polypeptide that displays regional similarity to the catalytic domain of the vaccinia virus cap methyltransferase. That the ABD1 gene product is indeed RNA (guanine-7-)methyltransferase was established by expressing the ABD1 protein in bacteria, purifying the protein to homogeneity, and characterizing the cap methyltransferase activity intrinsic to recombinant ABD1. The physical and biochemical properties of recombinant ABD1 methyltransferase were indistinguishable from those of the cap methyltransferase isolated and partially purified from whole-cell yeast extracts. Our finding that the ABD1 gene is required for yeast growth provides the first genetic evidence that a cap methyltransferase (and, by inference, the cap methyl group) plays an essential role in cellular function in vivo.