The Tat protein binds to TAR RNA to stimulate the expression of the human immunodeficiency virus type 1 (HIV-1) genome. Tat is an 86 amino acid protein that contains a short region of basic residues (aa49-aa57) that are required for RNA binding and TAR is a 59 nucleotide stem-loop with a tripyrimidine bulge in the upper stem. TAR is located at the 5' end of all viral RNAs. In vitro, Tat specifically interacts with TAR by recognising the sequence of the bulge and upper stem, with no requirement for the loop. However, in vivo the loop sequence is critical for activation, implying a requirement for accessory cellular TAR RNA binding factors. A number of TAR binding cellular factors have been identified in cell extracts and various models for the function of these factors have been suggested, including roles as coactivators and inhibitors. We have now identified a novel 38 kD cellular factor that has little general, single-stranded or double-stranded RNA binding activity, but that specifically recognises the bulge and upper stem region of TAR. The protein, referred to as BBP (bulge binding protein), is conserved in mammalian and amphibian cells and in Schizosaccharomyces pombe but is not found in Saccharomyces cerevisiae. BBP is an effective competitive inhibitor of Tat binding to TAR in vitro. Our data suggest that the bulge-stem recognition motif in TAR is used to mediate cellular factor/RNA interactions and indicates that Tat action might be inhibited by such competing reactions in vivo.