Arabidopsis thaliana HYPONASTIC LEAVES1 (HYL1) is a microRNA (miRNA) biogenesis protein that contains two N-terminal double-stranded RNA binding domains (dsRBDs), a putative nuclear localization site (NLS), and a putative protein-protein interaction domain. The interaction of HYL1 with DICER-LIKE1 is important for the efficient and precise processing of miRNA primary transcripts in plant miRNA biogenesis. To define the roles of the various domains of HYL1 in miRNA processing and the miRNA-directed phenotype, we transferred a series of HYL1 deletion constructs into hyl1 null mutants. The N-terminal region containing dsRBD1 and dsRBD2 completely rescued the mutant phenotype of hyl1, triggering the accumulation of miR166 and miR160 and resulting in reduced mRNA levels of the targeted genes. In vivo biochemical analysis of the HYL1-containing complexes from the transgenic plants revealed that the N-terminal dsRBDs of HYL1 were sufficient for processing miRNA precursors and the generation of mature miRNA. Transient and stable expression analysis demonstrated that the putative NLS domain was indeed the nuclear localization signal, whereas the N-terminal region containing the dsRBDs was not restricted to the nucleus. We suggest that the N-terminal dsRBDs fulfill the function of the whole HYL1 and thus play an essential role in miRNA processing and miRNA-directed silencing of targeted genes.