The two dark sectors of the universe - dark matter and dark energy - may interact with each other. Background and linear density perturbation evolution equations are developed for a generic coupling. We then establish the general conditions necessary to obtain models free from early time non-adiabatic instabilities. As an application, we consider a viable universe in which the interaction strength is proportional to the dark energy density. The scenario does not exhibit "phantom crossing" and is free from instabilities, including early ones. A sizeable interaction strength is compatible with combined WMAP, HST, SN, LSS and H(z) data. Neutrino mass and/or cosmic curvature are allowed to be larger than in non-interacting models. Our analysis sheds light as well on unstable scenarios previously proposed.

30 pages, 10 figures