An elongation block to RNA polymerase II transcription in exon 1 is a major regulatory step in expression of the murine adenosine deaminase (ADA) gene. Previous work in the laboratory identified abundant short transcripts with 3' termini in exon 1 in steady-state RNA from injected oocytes. Using a cell-free system to investigate the mechanism of premature 3' end formation, we found that polymerase II generates prominent ADA transcripts approximately 96 to 100 nucleotides in length which are similar to the major short transcripts found in steady-state RNA from oocytes injected with ADA templates. We have determined that these transcripts are the processed products of 108- to 112-nucleotide precursors. Precursor formation is (i) favored in reactions using circular templates, (ii) not the result of a posttranscriptional processing event, (iii) sensitive to low concentrations of Sarkosyl, and (iv) dependent on a factor(s) which is inactivated in crude extracts at 47 degrees C for 15 min. The cell-free system will allow further characterization of the template and factor requirements involved in the control of premature 3' end formation by RNA polymerase II.