When mouse 3T3-F442A preadipocyte fibroblasts reach confluence in the appropriate culture medium, their growth is arrested, and the cells undergo terminal differentiation to adipocytes. Two proteins that may be involved in this process are interferon and the interferon-induced double-stranded RNA (dsRNA)-dependent protein kinase (DAI). In 3T3-F442A cells, interferon and DAI are transiently expressed with a maximum level of active kinase appearing at confluence. Interestingly, the level of active DAI was found to be low when cells were maintained under conditions nonpermissive for differentiation. This reduction in DAI was at least partly because of the presence of elevated levels of a specific inhibitor of DAI, termed dRF, which appeared to be a reversible inhibitor of the autophosphorylation (activation) of DAI. In the present study, the mechanism of action of dRF was investigated. Photocross-linking experiments indicated that dRF prevented the binding of ATP to DAI. Since the binding of ATP to DAI is dsRNA-dependent, we examined the effect of dRF on the binding of dsRNA to the kinase using RNA mobility shift assays. dRF was found to prevent the formation of DAI-dsRNA complexes without a direct effect on the dsRNA. This suggests that dRF exerts its effect through an interaction with DAI.