Hypoxia is a growth inhibitory stress associated with multiple disease states. We find that hypoxic stress actively regulates transcription not only by activation of specific genes but also by selective repression. We reconstituted this bimodal response to hypoxia in vitro and determined a mechanism for hypoxia-mediated repression of transcription. Hypoxic cell extracts are competent for transcript elongation, but cannot assemble a functional preinitiation complex (PIC) at a subset of promoters. PIC assembly and RNA polymerase II C-terminal domain (CTD) phosphorylation were blocked by hypoxic induction and core promoter binding of negative cofactor 2 protein (NC2 alpha/beta, Dr1/DrAP1). Immunodepletion of NC2 beta/Dr1 protein complexes rescued hypoxic-repressed transcription without alteration of normoxic transcription. Physiological regulation of NC2 activity may represent an active means of conserving energy in response to hypoxic stress.