The RAT1 gene of Saccharomyces cerevisiae encodes a 5'-->3' exoribonuclease which plays an essential role in yeast RNA degradation and/or processing in the nucleus. We have cloned a previously uncharacterized gene (YGL246c) that we refer to as RAI1 (Rat1p interacting protein 1). RAI1 is homologous to Caenorhabditis elegans DOM-3 and human DOM3Z. Deletion of RAI1 confers a growth defect which can be complemented by an additional copy of RAT1 on a centromeric vector or by directing Xrn1p, the cytoplasmic homolog of Rat1p, to the nucleus through the addition of a nuclear targeting sequence. Deletion of RAI1 is synthetically lethal with the rat1-1(ts) mutation and shows genetic interaction with a deletion of SKI2 but not XRN1. Polysome analysis of an rai1 deletion mutant indicated a defect in 60S biogenesis which was nearly fully reversed by high-copy RAT1. Northern blot analysis of rRNAs revealed that rai1 is required for normal 5.8S processing. In the absence of RAI1, 5.8S(L) was the predominant form of 5.8S and there was an accumulation of 3'-extended forms but not 5'-extended species of 5. 8S. In addition, a 27S pre-rRNA species accumulated in the rai1 mutant. Thus, deletion of RAI1 affects both 5' and 3' processing reactions of 5.8S rRNA. Consistent with the in vivo data suggesting that RAI1 enhances RAT1 function, purified Rai1p stabilized the in vitro exoribonuclease activity of Rat1p.