We report that adenovirus 2 DNA sequences located between positions-66 and -51 upstream of the major late cap site (position +1) enhance transcription initiation from this promoter by up to 5- to 10-fold in HeLa whole cell lysates. This enhancing effect is template concentration-dependent and is abolished by truncation of the template immediately upstream of -66. Additionally, specific transcripts are not detected from templates truncated at +33 downstream of the cap site. These results define a minimum region of approximately 100 base pairs encompassing the transcription start site that appears to interact with the RNA polymerase II transcription complex during initiation. Analysis of the shortest runoff transcripts that can be synthesized in vitro revealed that RNAs as short as 50 nucleotides are quantitatively modified by guanylylation and methylation to cap 1 structures. In contrast, short RNAs containing guanylylated but unmethylated cap structures are not efficiently utilized as substrates by endogenous cap-methylating enzymes in the HeLa lysate. These findings, together with the observation that the synthesis of short transcripts is sensitive to the presence of the methyltransferase inhibitor S-adenosylhomocysteine, suggest that cap formation is a promoter-proximal event that occurs concomitantly with the synthesis of a nascent RNA polymerase II transcript.