RNA triphosphatase, RNA guanylyltransferase, and RNA (guanine-N7-)-methyltransferase activities are associated with the vaccinia virus mRNA capping enzyme, a heterodimeric protein containing polypeptides of M(r) 95,000 and 31,000. Although the RNA triphosphatase and RNA guanylyltransferase domains have been localized to a M(r) 59,000 fragment of the capping enzyme large subunit, the location of the methyltransferase domain within the protein and the catalytic role of individual subunits in methyl group transfer remain unclear. In the present work, through the study of methyltransferase activity of truncated forms of capping enzyme translated in vitro in a rabbit reticulocyte lysate, we have localized the methyltransferase domain to a complex consisting of the small subunit and the carboxyl-terminal portion of the large subunit. The M(r) 31,000 subunit translated alone was not sufficient for methyltransferase activity. This requirement for both subunits may explain the tight physical association of the two polypeptides in vivo. We have recreated the association of the large and small enzyme subunits in vitro through the translation of synthetic mRNAs encoding the two polypeptides. Study of the ability of deleted versions of the large subunit to bind the small subunit, as detected by co-immunoprecipitation, defined a 347-amino acid carboxyl-terminal region of the large subunit that was sufficient for heterodimerization. Colocalization within the large subunit of the methyltransferase and subunit association domains suggests that dimerization of the subunits may be required for methyltransferase activity.