We have previously reported that the removal of a 20-nucleotide sequence, termed the D sequence, from both ends of the inverted terminal repeats (ITRs) in the adeno-associated virus serotype 2 (AAV2) genome significantly impairs rescue, replication, and encapsidation of the viral genomes (X. S. Wang, S. Ponnazhagan, and A. Srivastava, J Mol Biol 250:573-580, 1995; X. S. Wang, S. Ponnazhagan, and A. Srivastava, J Virol 70:1668-1677, 1996). Here we describe that replacement of only one D sequence in either ITR restores each of these functions, but DNA strands of only single polarity are encapsidated in mature progeny virions. Since most commonly used recombinant AAV vectors contain a single-stranded DNA (ssDNA), which is transcriptionally inactive, efficient transgene expression from AAV vectors is dependent upon viral second-strand DNA synthesis. We have also identified a transcription suppressor sequence in one of the D sequences, which shares homology with the binding site for the cellular NF-κB-repressing factor (NRF). The removal of this D sequence from, and replacement with a sequence containing putative binding sites for transcription factors in, single-stranded AAV (ssAAV) vectors significantly augments transgene expression both in human cell lines in vitro and in murine hepatocytes in vivo. The development of these genome-modified ss AAV vectors has implications not only for the basic biology of AAV but also for the optimal use of these vectors in human gene therapy.