The Tat protein of human immunodeficiency virus type 1 (HIV-1) trans-activates viral gene expression and is obligatory for virus replication. Tat function is mediated through a sequence termed TAR that comprises part of the 5'-noncoding region of all HIV-1 mRNAs. This region forms a stable stem-loop structure in vitro. Recent evidence indicates that Tat binds directly to the TAR RNA sequence, and this binding is independent of the nucleotide sequence in the loop but dependent on the integrity of the upper stem. We used the electrophoretic mobility-shift assay to identify the sequence and structure specificity of this interaction and its correlation with Tat trans-activation. We show that a 3-nucleotide bulge structure (positions +23 to +25) in TAR RNA is important for both Tat interaction with TAR RNA and Tat-mediated trans-activation of gene expression. Single base substitutions at position +23 that impair Tat-mediated trans-activation in vivo also reduce binding of Tat to TAR in vitro, suggesting that the first uridine residue in the bulge is the critical base for both functions. In contrast, mutations in the loop (positions +31 to +34) and the stem (positions +9 to +12 and +49 to +52), which reduce Tat-mediated trans-activation, had no effect on Tat binding. We also show that a Tat peptide that includes the basic region required for nucleolar localization binds to TAR RNA with the same specificity as the full-length protein. We conclude that Tat binding to TAR is necessary but not sufficient by itself to account for trans-activation.