Regulation of transcription elongation is an important mechanism in controlling eukaryotic gene expression. SII is an RNA polymerase II-binding protein that stimulates transcription elongation and also activates nascent transcript cleavage by RNA polymerase II in elongation complexes in vitro (Reines, D. (1992) J. Biol. Chem. 267, 3795-3800). Here we show that SII-dependent in vitro transcription through an arrest site in a human gene is preceded by nascent transcript cleavage. RNA cleavage appeared to be an obligatory step in the SII activation process. Recombinant SII activated cleavage while a truncated derivative lacking polymerase binding activity did not. Cleavage was not restricted to an elongation complex arrested at this particular site, showing that nascent RNA hydrolysis is a general property of RNA polymerase II elongation complexes. These data support a model whereby SII stimulates elongation via a ribonuclease activity of the elongation complex.