gypsy is the only endogenous retrovirus of Drosophila whose infectious properties have been reported. Previous studies have shown an unexpected relationship between the gene encoding the putative envelope glycoprotein (Env) of gypsy and genes encoding the fusion protein of several baculoviruses. The fact that fusion proteins mediate membrane fusion suggests that Env of insect retroviruses might also have fusogenic properties. The results reported here indicate that gypsy Env mediates cell-to-cell fusion. Cleavage of the Env precursor was also studied; it is shown that this polypeptide is cleaved at a furin-like cleavage site. This is the first report that the env-like gene of insect retroviruses encodes a fusion protein.