Unspliced cytoplasmic retroviral RNA in chronically infected cells either is encapsidated by Gag proteins in the manufacture of virus or is used to direct synthesis of Gag proteins. Several models have been suggested to explain the sorting of viral RNA for these two purposes. Here we present evidence supporting a simple biochemical mechanism that accounts for the routing of retroviral RNA. Our results indicate that ribosomes compete with the Gag proteins to determine the fate of nascent retroviral RNA. Although the integrity of the entire Rous sarcoma virus leader sequence is important for retroviral packaging and translation, the RNA structure around the third small open reading frame, which neighbors the Ψ site required for packaging of the RNA, is particularly critical for maintenance of the balance between translation and packaging. These results support the hypothesis that Gag proteins autogenously regulate their synthesis and encapsidation of retroviral RNA and that an equilibrium exists between RNA destined for translation and packaging that is based on the intracellular levels of Gag proteins and ribosomes. To test the model, mRNAs with natural or mutated 5' leader sequences from Rous sarcoma virus were expressed in avian cells in the presence and absence of Pr76(gag). We demonstrate that Pr76(gag) acts as a translational repressor of these mRNAs in a dose-dependent manner, supporting the hypothesis that Pr76(gag) can sort retroviral RNA for translation and encapsidation.