Formation of infectious HIV-1 involves assembly of Gag polyproteins into immature particles and subsequent assembly of mature capsids after proteolytic disassembly of the Gag shell. We report a 12-mer peptide, capsid assembly inhibitor (CAI), that binds the capsid (CA) domain of Gag and inhibits assembly of immature- and mature-like capsid particles in vitro. CAI was identified by phage display screening among a group of peptides with similar sequences that bind to a single reactive site in CA. Its binding site was mapped to CA residues 169-191, with an additional contribution from the last helix of CA. This result was confirmed by a separate X-ray structure analysis showing that CAI inserts into a conserved hydrophobic groove and alters the CA dimer interface. The CAI binding site is a new target for antiviral development, and CAI is the first known inhibitor directed against assembly of immature HIV-1.