We propose a mechanism for the priming of influenza viral RNA transcription by capped RNAs in which specific 5'-terminal fragments are cleaved from the capped RNAs by a virion-associated endonuclease. These fragments would serve as the actual primers for the initiation of transcription by the initial incorporation by the initial incorporation of a G residue at their 3' end. We show that virions and purified viral cores contain a unique endonuclease that cleaves RNAs containing a 5' methylated cap structure (m7GpppXm) preferentially at purine residues 10 to 14 nucleotides from the cap, generating fragments with 3'-terminal hydroxyl groups. RNAs containing the 5'-terminal structure GpppG could not be cleaved to produce these specific fragments. Consistent with our proposed mechanism, those capped fragments that function as primers could be linked to a G residue in transcriptase reactions containing alpha-32P-GTP as the only ribonucleoside triphosphate. The pattern of G and C incorporation onto these primer fragments suggests that this incorporation is directed by the second and third bases at the 3' end of the virion RNA template, which has the sequence 3' UCG. Primer fragments with a 3'-terminal A residue were used more efficiently than those with a 3'-terminal G residue, indicating a preference for generating an AGC sequence in the viral mRNA complementary to the 3' end of the virion RNA. Cleavage of the RNA primer and initiation of transcription are not necessarily coupled, because a 5' fragment isolated from one reaction could be used as a primer when added to a second reaction. Uncapped ribopolymer inhibitors of viral RNA transcription inhibited the cleavage of capped RNAs.