MicroRNAs (miRNAs) are a class of approximately 22-nucleotide noncoding RNAs that inhibit the expression of specific target genes at the posttranscriptional level. Recently, 11 miRNAs encoded by the pathogenic human herpesvirus Kaposi's sarcoma-associated herpesvirus (KSHV) were cloned from latently infected cells. While the expression of these miRNAs has been confirmed by Northern analysis, their ability to inhibit target gene expression has not been demonstrated. We have devised a novel assay for miRNA function that uses lentiviral indicator vectors carrying two perfectly complementary target sites for each given miRNA in the 3' untranslated region of the Renilla luciferase gene. This assay allowed us to demonstrate the activity of each viral miRNA upon cotransduction of cells with the Renilla luciferase indicator vector together with a firefly luciferase control vector. In KSHV-infected BC-1 and BCBL-1 cells, but not uninfected control cells, Renilla luciferase expression was selectively reduced up to 10-fold. Interestingly, one of the viral miRNAs (miR-K5) exhibited much higher activity in BC-1 cells than in BCBL-1 cells. Sequence analysis of both viral genomes revealed a single nucleotide polymorphism in the miR-K5 precursor stem-loop, which inhibits the expression of mature miR-K5 in BCBL-1 cells. We show that the primary miR-K5 sequence present in BCBL-1 results in diminished processing by Drosha both in vivo and in vitro. This is the first report of a naturally occurring sequence polymorphism in an miRNA precursor that results in reduced processing and therefore lower levels of mature miRNA expression and function.