Overexpression of trans-acting response element (TAR)-containing sequences (TAR decoys) in CEM SS cells renders cells resistant to human immunodeficiency type 1 (HIV-1) replication. Mutagenesis of TAR was used to investigate the molecular mechanism underlying the observed inhibition. A nucleotide change which disrupts the stem structure of TAR or sequence alterations in the loop abolish the ability of the corresponding TAR decoy RNAs to inhibit HIV replication. A compensatory mutation which restores the stem structure also restores TAR decoy RNA function. Synthesis of viral RNA is drastically reduced in cells expressing a functional TAR decoy RNA, but it is unaffected in cells expressing a mutant form of TAR decoy RNA. It is therefore concluded that overexpression of TAR-containing sequences in CEM SS cells interferes with the process of Tat-mediated transactivation of viral gene expression. However, the phenotype of several mutations suggests that TAR decoy RNA does not inhibit HIV-1 gene expression by simply sequestering Tat but rather does so by sequestering a transactivation protein complex, implying that transactivation requires the cooperative binding of both Tat and a loop-binding cellular factor(s) to TAR. Expression of wild-type or mutant forms of TAR had no discernible effects on cell viability, thus reducing concerns about using TAR decoy RNAs as part of an intracellular immunization protocol for the treatment of AIDS.