Nrd1 is an essential yeast protein of unknown function that has an RNA recognition motif (RRM) in its carboxyl half and a putative RNA polymerase II-binding domain, the CTD-binding motif, at its amino terminus. Nrd1 mediates a severe reduction in pre-mRNA production from a reporter gene bearing an exogenous sequence element in its intron. The effect of the inserted element is highly sequence-specific and is accompanied by the appearance of 3'-truncated transcripts. We have proposed that Nrd1 binds to the exogenous sequence element in the nascent pre-mRNA during transcription, aided by the CTD-binding motif, and directs 3'-end formation a short distance downstream. Here we show that highly purified Nrd1 carboxyl half binds tightly to the RNA element in vitro with sequence specificity that correlates with the efficiency of cis-element-directed down-regulation in vivo. A large deletion in the CTD-binding motif blocks down-regulation but does not affect the essential function of Nrd1. Furthermore, a nonsense mutant allele that produces truncated Nrd1 protein lacking the RRM has a dominant-negative effect on down-regulation but not on cell growth. Viability of this and several other nonsense alleles of Nrd1 appears to require translational readthrough, which in one case is extremely efficient. Thus the CTD-binding motif of Nrd1 is important for pre-mRNA down-regulation but is not required for the essential function of Nrd1. In contrast, the RNA-binding activity of Nrd1 appears to be required both for down-regulation and for its essential function.