Hepatitis B virus (HBV) is the smallest DNA virus and the major cause of acute and chronic hepatitis. The 3.2 kb HBV viral genome generates four major species of unspliced viral transcript as well as several alternatively spliced RNAs. A 2.2 kb singly-spliced RNA is the most abundant spliced RNA and is widely expressed among all HBV genotypes. The expression of the singly-spliced RNA, as well as that of its encoded protein HBSP, is strongly associated with hepatopathology during HBV infection. Here, we report a novel inhibitory role of a p21.5 protein, which is encoded by a 2.2 kb singly-spliced RNA, in the modulation of HBV replication. We show that overexpression of the singly-spliced RNA is able to efficiently inhibit HBV replication. Furthermore, a mutation in the ATG start codon of the precore region completely abolishes the inhibitory effect of the singly-spliced RNA, indicating that a viral protein (p21.5) derived from the singly-spliced RNA is the mediator of the inhibition. Furthermore, p21.5 is able to form a homodimer that interacts with core dimers forming hybrid viral assembly components. Sucrose gradient fractionation revealed that co-expression of p21.5 resulted in a spread distribution pattern of core proteins ranging from low to high sucrose densities. When compared with p22, p21.5 is almost ten times more efficient at destabilizing HBV nucleocapsid assembly in Huh7 cells overexpressing either p21.5 or p22 protein. Moreover, in vivo expression of p21.5 protein by tail vein injection was found to decrease the amount of nucleocapsid in the livers of HBV-expressing BALB/c mice. In conclusion, our study reveals that the HBV 2.2 kb singly-spliced RNA encodes a 21.5 kDa viral protein that significantly interferes with the assembly of nucleocapsids during HBV nucleocapsid formation. These findings provide a possible strategy for elimination of HBV particles inside cells.