Studies involving ribozyme-directed inactivation of targeted RNA molecules have met with mixed success, making clear the importance of methods to measure and optimize ribozyme activity within cells. The interpretation of biochemical assays for determining ribozyme activity in the cellular environment have been complicated by recent results indicating that hammerhead and hairpin ribozymes can cleave RNA following cellular lysis. Here, we report the results of experiments in which the catalytic activity of hairpin ribozymes is monitored following expression in mammalian cells, and in which post-lysis cleavage is rigorously excluded through a series of biochemical and genetic controls. Following transient transfection, self-processing transcripts containing active and inactive hairpin ribozymes together with cleavable and non-cleavable substrates were generated within the cytoplasm of mouse OST7-1 cells using T7 RNA polymerase. Unprocessed RNA and products ofintracellular cleavage were detected and analyzed using a primer-extension assay. Ribozyme-containing transcripts accumulated to a level of 4 x 10(4) copies per cell, and self-processing proceeded to an extent of >75% within cells. Cellular RNA processing was blocked by mutations within the ribozyme (G8A, G21U) or substrate (DeltaA-1) that, in vitro , eliminate cleavage without affecting substrate binding. In addition to self-processing activity, trans -cleavage reactions were supported by the ribozyme-containing product of the self-processing reaction, and by the ribozyme linked to the non-cleavable substrate analog. Ribozyme activity was present in extracts of cells expressing constructs with active ribozyme domains. These results provide direct biochemical evidence for the catalytic activity of the hairpin ribozyme in a cellular environment, and indicate that self-processing ribozyme transcripts may be well suited for cellular RNA-inactivation experiments.