Overexpression of dominant-negative mutants of various viral proteins can result in 'intracellular immunization'. Here we describe a new approach to interfering with viral replication in which a nuclease is fused to a capsid component so that the nuclease is encapsidated inside the virion where it can inactivate viral nucleic acid. We used Ty1, a yeast retrotransposon whose transposition closely parallels retroviral replication mechanisms and serves as an easily manipulated model for the retroviral infection process. We constructed fusion genes consisting of the region encoding the N-terminal portion of the TYA/TYB open reading frames of retrotransposon Ty1 and either of two different nuclease genes. Ty1-nuclease fusion proteins are targeted to Ty1 virus-like particles, and are active in degrading nucleic acids. A Ty1-barnase fusion protein causes 98-99% reduction in the efficiency of Ty1 transposition in vivo, presumably by degrading encapsidated Ty1 RNA. This strategy, referred to as capsid-targeted viral inactivation, may be useful for interfering with the replication of retroviruses and other viruses.