Reovirus sigma3 is a virion outer shell protein that also binds dsRNA and stimulates translation by blocking activation of the dsRNA-dependent protein kinase, PKR. Purified sigma3 was shown by gel shift assay to bind specifically to RNA duplexes of minimal length 32-45 base pairs. PKR binding to dsRNA was prevented by sigma3, and translation inhibition of luciferase reporter by PKR expression in transfected cells was reversed by sigma3. Association of sigma3 with its outer capsid partner mu1/mu1C eliminated dsRNA binding and prevented restoration of protein synthesis. Analyses of sigma3 mutants demonstrated a direct correlation between dsRNA binding and reversal of the down-regulation of translation by PKR. In infected cells, sigma3 was stable but dsRNA binding decreased, presumably due to mu1/mu1C complex formation. The results suggest a functional transition from early inhibition of PKR activation by sigma3 to its association with mu1/mu1C in capsid structures.