A hallmark of RNA interference is the production of short double-stranded RNA (dsRNA) molecules 21-28 nucleotides in length by the specialized RNase III protein Dicer. Dicer enzymes uniquely generate RNA products of specific lengths by mechanisms that have not been fully elucidated. Here we show that the PAZ domain responsible for dsRNA end recognition confers this measuring ability through both its structural position and RNA-binding specificity. Point mutations define the dsRNA-binding surface and reveal a protein loop important for cleavage of substrates containing perfect or imperfect base pairing. On the basis of these results, we reengineered Dicer with a U1A RNA-binding domain in place of the PAZ domain to create an enzyme with altered end-recognition specificity and RNA product length. These results explain how Dicer functions as a molecular ruler and provide a structural basis for modifying its activity in cells.