The "hairpin" ribozyme derived from the minus strand of tobacco ringspot virus satellite RNA [(-)sTRSV] efficiently catalyzes sequence-specific RNA hydrolysis in trans (Feldstein et al., 1989; Hampel & Triz, 1989; Haseloff & Gerlach, 1989). The ribozyme does not cleave DNA. An RNA substrate analogue containing a single deoxyribonucleotide residue 5' to the cleavage site (A-1) binds to the ribozyme efficiently but cannot be cleaved. A DNA substrate analogue with a ribonucleotide at A-1 is cleaved; thus A-1 provides the only 2'-OH required for cleavage. These results support cleavage via a transphosphorylation mechanism initiated by attack of the 2'-OH of A-1 on the scissile phosphodiester. The ribozyme discriminates between DNA and RNA in both binding and cleavage. Results indicate that the 2'-OH of A-1 functions in complex stabilization as well as cleavage. The ribozyme efficiently cleaves a phosphorothioate diester linkage, suggesting that the pro-Rp oxygen at the scissile phosphodiester does not coordinate Mg2+.