Complement-mediated lysis of sheep erythrocytes coated with optimal concentrations of rabbit IgG hemolysin was inhibited by euglobulin fractions from the sera of patients with seropositive rheumatoid arthritis. That this was due to direct interaction with the IgG coat on the red cell rather than a nonspecific reaction with complement in the fluid phase was confirmed by controls using cells coated with IgM hemolysin. The inhibitory activity was recovered in purified IgM rheumatoid factor preparations and could be absorbed out with insoluble aggregated human IgG. The inhibitory potency of the rheumatoid factors correlated well with their sheep cell agglutination titers. Inhibition was not the result of physical aggregation of the erythrocytes by rheumatoid factor. Kinetic studies were consistent with the view that rheumatoid factor displaces C1q from its binding to IgG. Paradoxically, at suboptimal sensitizing concentrations of IgG hemolysin, rheumatoid factor enhances the fixation of complement. These results can be interpreted on the basis of the blockage of complement fixation by IgG and its replacement by a relatively weak direct fixation by the IgM rheumatoid factor. Thus, the interaction of RF with IgG generates only a limited ability to fix complement which, when contrasted with the fixation at suboptimal concentrations of IgG hemolysin alone, appears as net enhancement; when this is contrasted with fixation occurring with optimal concentrations of IgG, it appears as net inhibition.