The phosphoprotein (P) of vesicular stomatitis virus (VSV) plays essential roles in viral RNA synthesis. It associates with nascent nucleoprotein (N) to form N(0)-P (free of RNAs), thereby preventing the N from binding to cellular RNAs and maintaining the N in a viral genomic RNA encapsidation-competent form for transcription and replication. The contributions of phosphorylation of P to transcription and replication have been studied intensively, but a concrete mechanism of action still remains unclear. In this study, using a VSV minigenome system, we demonstrated that a mutant of P lacking N-terminal phosphorylation (P3A), in which the N-terminal phosphate acceptor sites are replaced with alanines (S60/A, T62/A, and S64/A), does not support transcription and replication. However, results from protein interaction assays showed that P3A self-associates and interacts with N and the large protein (L) as efficiently as P does. Furthermore, purified recombinant P3A from Sf21 cells supported transcription in an in vitro transcription reconstitution assay. We also proved that P3A is not distributed intranuclearly in vivo. CsCl gradient centrifugation showed that P3A is incapable of preventing N from binding to cellular RNAs and therefore prevents functional template formation. Taken together, our results demonstrate that N-terminal phosphorylation is indispensable for P to prevent N from binding to nonviral RNAs and to maintain the N-specific encapsidation of viral genomic RNA for functional template formation.