The HEN1 methyltransferase from Arabidopsis thaliana modifies the 3'-terminal nucleotides of small regulatory RNAs. Although it is one of the best characterized members of the 2'-O-methyltransferase family, many aspects of its interactions with the cofactor and substrate RNA remained unresolved. To better understand the substrate interactions and contributions of individual steps during HEN1 catalysis, we studied the binding and methylation kinetics of the enzyme using a series of unmethylated, hemimethylated and doubly methylated miRNA and siRNA substrates. The present study shows that HEN1 specifically binds double-stranded unmethylated or hemimethylated miR173/miR173* substrates with a subnanomolar affinity in a cofactor-dependent manner. Kinetic studies under single turnover and pre-steady state conditions in combination with isotope partitioning analysis showed that the binary HEN1-miRNA/miRNA* complex is catalytically competent; however, successive methylation of the two strands in a RNA duplex occurs in a non-processive (distributive) manner. We also find that the observed moderate methylation strand preference is largely exerted at the RNA-binding step and is fairly independent of the nature of the 3'-terminal nucleobase, but shows some dependency on proximal nucleotide mispairs. The results of the present study thus provide novel insights into the mechanism of RNA recognition and modification by a representative small RNA 2'-O-methyltransferase.