The ability of the HIV-1 Tat protein to trans -activate HIV-1 transcription in vitro is specifically inhibited by a circular TAR RNA decoy. This inhibition is not overcome by adding an excess of Tat to the reaction but is partially overcome by adding Tat in combination with nuclear extract, suggesting that TAR RNA might function by interacting with a complex containing Tat and cellular factor(s). A cell-free transcription system involving immobilized DNA templates was used to further define the factor(s) that interact with TAR RNA. Preinitiation complexes formed in the presence or absence of Tat were purified on immobilized templates containing the HIV-1 promoter. After washing, nucleotides and radiolabelled UTP were added and transcription was measured. The presence of Tat during preinitiation complex formation resulted in an increase in the level of full-length HIV-1 transcripts. This Tat-activated increase in HIV-1 transcription was not inhibited by circular TAR decoys added during preinitiation complex formation but was inhibited by circular TAR decoys subsequently added during the transcription reaction. These results suggest that TAR decoys inhibit Tat-activated HIV-1 transcription after preinitiation complex formation, perhaps by interacting with components of transcription complexes.