The coronavirus family of positive-strand RNA viruses includes important pathogens of livestock, companion animals, and humans, including the severe acute respiratory syndrome coronavirus that was responsible for a worldwide outbreak in 2003. The unusually complex coronavirus replicase/transcriptase is comprised of 15 or 16 virus-specific subunits that are autoproteolytically derived from two large polyproteins. In line with bioinformatics predictions, we now show that feline coronavirus (FCoV) nonstructural protein 16 (nsp16) possesses an S-adenosyl-L-methionine (AdoMet)-dependent RNA (nucleoside-2'O)-methyltransferase (2'O-MTase) activity that is capable of cap-1 formation. Purified recombinant FCoV nsp16 selectively binds to short capped RNAs. Remarkably, an N7-methyl guanosine cap ((7Me)GpppAC(3-6)) is a prerequisite for binding. High-performance liquid chromatography analysis demonstrated that nsp16 mediates methyl transfer from AdoMet to the 2'O position of the first transcribed nucleotide, thus converting (7Me)GpppAC(3-6) into (7Me)GpppA(2')(O)(Me)C(3-6). The characterization of 11 nsp16 mutants supported the previous identification of residues K45, D129, K169, and E202 as the putative K-D-K-E catalytic tetrad of the enzyme. Furthermore, residues Y29 and F173 of FCoV nsp16, which may be the functional counterparts of aromatic residues involved in substrate recognition by the vaccinia virus MTase VP39, were found to be essential for both substrate binding and 2'O-MTase activity. Finally, the weak inhibition profile of different AdoMet analogues indicates that nsp16 has evolved an atypical AdoMet binding site. Our results suggest that coronavirus mRNA carries a cap-1, onto which 2'O methylation follows an order of events in which 2'O-methyl transfer must be preceded by guanine N7 methylation, with the latter step being performed by a yet-unknown N7-specific MTase.