The proper temporal and spatial expression of genes during plant development is governed, in part, by the regulatory activities of various types of small RNAs produced by the different RNAi pathways. Here we report that transgenic Arabidopsis plants constitutively expressing the rapeseed SB1 SINE retroposon exhibit developmental defects resembling those observed in some RNAi mutants. We show that SB1 RNA interacts with HYL1 (DRB1), a double-stranded RNA-binding protein (dsRBP) that associates with the Dicer homologue DCL1 to produce microRNAs. RNase V1 protection assays mapped the binding site of HYL1 to a SB1 region that mimics the hairpin structure of microRNA precursors. We also show that HYL1, upon binding to RNA substrates, induces conformational changes that force single-stranded RNA regions to adopt a structured helix-like conformation. Xenopus laevis ADAR1, but not Arabidopsis DRB4, binds SB1 RNA in the same region as HYL1, suggesting that SINE RNAs bind only a subset of dsRBPs. Consistently, DCL4-DRB4-dependent miRNA accumulation was unchanged in SB1 transgenic Arabidopsis, whereas DCL1-HYL1-dependent miRNA and DCL1-HYL1-DCL4-DRB4-dependent tasiRNA accumulation was decreased. We propose that SINE RNA can modulate the activity of the RNAi pathways in plants and possibly in other eukaryotes.