RNA interference (RNAi) in animals, cosuppression in plants, and quelling in fungi are homology-dependent gene silencing mechanisms in which the introduction of either double-stranded RNA (dsRNA) or transgenes induces sequence-specific mRNA degradation. These phenomena share a common genetic and mechanistic basis. The accumulation of short interfering RNA (siRNA) molecules that guide sequence-specific mRNA degradation is a common feature in both silencing mechanisms, as is the component of the RNase complex involved in mRNA cleavage. During RNAi in animal cells, dsRNA is processed into siRNA by an RNase III enzyme called Dicer. Here we show that elimination of the activity of two Dicer-like genes by mutation in the fungus Neurospora crassa eliminates transgene-induced gene silencing (quelling) and the processing of dsRNA to an siRNA form. The two Dicer-like genes appear redundant because single mutants are quelling proficient. This first demonstration of the involvement of Dicer in gene silencing induced by transgenes supports a model by which a dsRNA produced by the activity of cellular RNA-dependent RNA polymerases on transgenic transcripts is an essential intermediate of silencing.