Synthesis of influenza virus mRNA is primed by capped and methylated (cap 1, m7GpppXm) RNAs which the virus derives by endonucleolytic cleavage from RNA polymerase II transcripts in host cells. The conserved nature of the endonucleolytic processing provides a unique target for the development of antiviral agents for influenza viruses. A series of 4-substituted 2,4-dioxobutanoic acid compounds has been identified as selective inhibitors of this activity in both influenza A and B viruses. These inhibitors exhibited 50% inhibitory concentrations in the range of 0.2 to 29.0 microM for cap-dependent influenza virus transcription and had no effect on the activity of other viral and cellular polymerases when tested at 100- to 500-fold higher concentrations. The compounds did not inhibit the initiation or elongation of influenza virus mRNA synthesis but specifically inhibited the cleavage of capped RNAs by the influenza virus endonuclease and were not inhibitory to the activities of other nucleases. Additionally, the compounds specifically inhibited replication of influenza A and B viruses in cell culture with potencies comparable to the 50% inhibitory concentrations obtained for transcription.