Eukaryotic ribonucleases H of known sequence are composed of an RNase H domain similar in size and sequence to that of Escherichia coli RNase HI and additional domains of unknown function. The RNase H1 of Saccharomyces cerevisiae has such an RNase H domain at its C-terminus. Here we show that the N-terminal non-RNase H portion of the yeast RNase H1 binds tightly to double-stranded RNA (dsRNA) and RNA-DNA hybrids even in the absence of the RNase H domain. Two copies of a sequence with limited similarity to the dsRNA-binding motif are present in this N-terminus. When the first of these sequences is altered, the protein no longer binds tightly to dsRNA and exhibits an increase in RNase H activity. Unlike other dsRNA-binding proteins, increasing the Mg2+ concentration from 0.5 mM to 5 mM inhibits binding of RNase H1 to dsRNA; yet a protein missing the RNase H domain binds strongly to dsRNA even at the higher Mg2+ concentration. These results suggest that binding to dsRNA and RNase H activity are mutually exclusive, and the Mg2+ concentration is critical for switching between the activities. Changes in the Mg2+ concentration or proteolytic severing of the dsRNA-binding domain could alter the activity or location of the RNase H and may govern access of the enzyme to the substrate. Sequences similar to the dsRNA-binding motif are present in other eukaryotic RNases H and the transactivating protein of cauliflower mosaic virus, suggesting that these proteins may also bind to dsRNA.