Fungal vesicles isolated from a hypovirulent strain (EP113) of the chestnut blight fungus, Cryphonectria parasitica, contained double-stranded RNA and possessed an RNA-dependent RNA polymerase activity which was absent in comparable preparations from dsRNA-free vesicles of a virulent strain (EP 155). RNA polymerase activity remained associated with hypovirulent vesicles when these were sedimented through a 10 to 40% sucrose gradient and the polymerase activity coincided with the peak of dsRNA content. Incorporation of [32P]-UTP into RNA was proportional to the amount of vesicles present in the reaction mixture. Enzyme activity was dependent upon the presence of dsRNA-containing vesicles, Mg2+ and the four ribonucleotide triphosphates, and was insensitive to inhibitors of DNA-dependent RNA polymerases. The optimum temperature for polymerase activity was 30 degrees, and temperatures higher than 35 degrees inactivated the enzyme. Treatment of vesicles with low concentrations of detergent led to a two- to threefold increase in the rate of RNA synthesis. The RNA polymerase products, synthesized in vitro, hybridized specifically with C. parasitica genomic dsRNAs. Hybridization to single-stranded cDNA clones containing inserts of the terminal domains of the homopolymer and heteropolymer ends of the dsRNA showed that the reaction products were full-length copies of both strands of the dsRNA. Single-stranded RNA synthesis was asymmetrical, with greater than 80% of the polymerase products being of positive polarity. It can be estimated that in the fungal vesicles isolated from hypovirulent C. parasitica, transcription of the dsRNA into mRNA for translation is in the order of two- to eightfold more active than replication. On the basis of our results and of the evidence accumulated so far, we suggest that the replication strategy employed by the hypovirulence-associated dsRNA is following that of positive-strand RNA viruses.