One of the major structural proteins of vesicular stomatitis virus is a small, nonglycosylated, matrix protein which associates with the nucleocapsid core during final stages of morphogenesis and budding. Biochemical and genetic studies suggested that the matrix protein regulates RNA synthesis both in vitro and in vivo. We have purified biologically active matrix protein from the virus and have directly shown that it significantly inhibits RNA synthesis in vitro mediated by the virion-associated RNA polymerase at low ionic strength (0.02 M). The inhibition was greater than 80% when the ratio of matrix protein to the major nucleocapsid protein in the transcribing complex was 2:1 (wt/wt). The inhibition was found to be at the level of RNA chain elongation and not at the initiation step. Electron microscopic studies revealed that inhibition of transcription by matrix protein was accompanied by a profound structural change of the transcribing nucleocapsid from an extended structure to a highly compact form. At higher ionic strength (0.12 M), the matrix protein failed to interact with the nucleocapsid. The matrix protein appears to be involved in condensing the nucleocapsid and blocking transcription during maturation of the virus particle.