In an earlier report, it was shown that aflatoxin B1 treatment strongly inhibits rat liver nucleolar RNA synthesis (Yu, F. L. (1977) J. Biol. Chem. 252, 3245-3251). The present paper is an attempt to elucidate the mechanism of this inhibition. Two h after aflatoxin B1 injection (0.3 mg/100 g body weight), rat liver nucleolar RNA synthesis, in vitro, was inhibited by an average of 90%. This inhibition could result from (a) inhibited RNA polymerase I activity per se, (b) impaired nucleolar DNA template, or (c) impaired nucleolar chromatin. Earlier studies found that the total RNA polymerase I activity was not affected by aflatoxin B1 treatment. In the present work the total nucleolar DNAs from control and from aflatoxin B1-treated groups were isolated and compared for template efficiencies in directing RNA synthesis with solubilized RNA polymerase I from the control group. No difference was found. However, when nucleolar chromatin function was analyzed, it was found that aflatoxin B1 treatment resulted in a dramatic reduction in the RNA chain elongation rate to only 13% of the control. The chain number, which is a measure of the number of engaged enzymes transcribing the nucleolar chromatin initiated in vivo, was only slightly reduced (33%). Furthermore since it was found that aflatoxin B1 treatment did not increase RNase activity in the treated nucleoli, the dramatic decrease in RNA chain elongation is therefore believed to be the major mechanism of aflatoxin B1 inhibition of rat liver nucleolar RNA synthesis. DNase I digestion of the nucleolar chromatin suggests that aflatoxin B1 treatment may have altered the conformation of the transcriptionally active regions of the nucleolar chromatin.