The vaccinia virus E3 protein is an important intracellular modulator of innate immunity that can be split into distinct halves. The C terminus contains a well defined dsRNA-binding domain, whereas the N terminus contains a Z-DNA-binding domain, and both domains are required for virulence. In this study, we investigated whether the E3 Z-DNA-binding domain functions by sequestering cytoplasmic dsDNA thereby preventing the induction of type I interferon (IFN). In line with this hypothesis, expression of E3 ablated both IFN-beta expression and NF-kappaB activity in response to the dsDNA, poly(dA-dT). However, surprisingly, the ability of E3 to block poly(dA-dT) signalling was independent of the N terminus, whereas the dsRNA-binding domain was essential, suggesting that the Z-DNA-binding domain does not bind immunostimulatory dsDNA. This was confirmed by the failure of E3 to co-precipitate with biotinylated dsDNA, whereas the recruitment of several cytoplasmic DNA-binding proteins could be detected. Recently, AT-rich dsDNA was reported to be transcribed into 5'-triphosphate poly(A-U) RNA by RNA polymerase III, which then activates retinoic acid-inducible gene I (RIG-I). Consistent with this, RNA from poly(dA-dT) transfected cells induced IFN-beta and expression of the E3 dsRNA-binding domain was sufficient to ablate this response. Given the well documented function of the E3 dsRNA-binding domain we propose that E3 blocks signalling in response to poly(dA-dT) by binding to transcribed poly(A-U) RNA preventing RIG-I activation. This report describes a DNA virus-encoded inhibitor of the RNA polymerase III-dsDNA-sensing pathway and extends our knowledge of E3 as a modulator of innate immunity.