Single-stranded small interfering RNA (siRNA) guides the cleavage of homologous mRNA by Argonaute proteins, the catalytic core of the RNA-induced silencing complex (RISC), in the conserved RNA interference (RNAi) pathway. The separation of the siRNA duplex into single strands is essential for the activation of RISC. Previous biochemical studies have suggested that Argonaute proteins cleave and remove the passenger strand of siRNA duplex from RISC, but the in vivo importance of this process and the mechanism for the removal of the nicked passenger strand are not known. Here, we show that in the filamentous fungus Neurospora, the Argonaute homolog QDE-2 and its slicer function are required for the generation of single-stranded siRNA and gene silencing in vivo. Biochemical purification of QDE-2 led to the identification of QIP, a QDE-2-interacting protein, with an exonuclease domain. The disruption of qip in Neurospora impaired gene silencing and siRNA accumulated, mostly in nicked duplex form. Furthermore, our results suggest that QIP acts as an exonuclease that cleaves and removes the nicked passenger strand from siRNA duplex in a QDE-2-dependent manner. Together, these results suggest that both the cleavage and removal of the passenger strand from the siRNA duplex are important steps in RNAi pathways.