5'-Capping is an early mRNA modification that has important consequences for downstream events in gene expression. We have isolated mammalian cDNAs encoding capping enzyme. They contain the sequence motifs characteristic of the nucleotidyl transferase superfamily. The predicted mouse and human enzymes consist of 597 amino acids and are 95% identical. Mouse cDNA directed synthesis of a guanylylated 68-kDa polypeptide that also contained RNA 5'-triphosphatase activity and catalyzed formation of RNA 5'-terminal GpppG. A haploid strain of Saccharomyces cerevisiae lacking mRNA guanylyltransferase was complemented for growth by the mouse cDNA. Conversion of Lys-294 in the KXDG-conserved motif eliminated both guanylylation and complementation, identifying it as the active site. The K294A mutant retained RNA 5'-triphosphatase activity, which was eliminated by N-terminal truncation. Full-length capping enzyme and an active C-terminal fragment bound to the elongating form and not to the initiating form of polymerase. The results document functional conservation of eukaryotic mRNA guanylyltransferases from yeast to mammals and indicate that the phosphorylated C-terminal domain of RNA polymerase II couples capping to transcription elongation. These results also explain the selective capping of RNA polymerase II transcripts.