Prokaryotic and eukaryotic RNA polymerases can use 2- to ∼4-nt RNAs, "nanoRNAs," to prime transcription initiation in vitro. It has been proposed that nanoRNA-mediated priming of transcription can likewise occur under physiological conditions in vivo and influence transcription start site selection and gene expression. However, no direct evidence of such regulation has been presented. Here we demonstrate in Escherichia coli that nanoRNAs prime transcription in a growth phase-dependent manner, resulting in alterations in transcription start site selection and changes in gene expression. We further define a sequence element that determines, in part, whether a promoter will be targeted by nanoRNA-mediated priming. By establishing that a significant fraction of transcription initiation is primed in living cells, our findings contradict the conventional model that all cellular transcription is initiated using nucleoside triphosphates (NTPs) only. In addition, our findings identify nanoRNAs as a previously undocumented class of regulatory small RNAs that function by being directly incorporated into a target transcript.