Intron-containing genes are often transcribed more efficiently than nonintronic genes. The effect of introns on transcription of genes is an evolutionarily conserved feature, being exhibited by such diverse organisms as yeast, plants, flies, and mammals. The mechanism of intron-mediated transcriptional activation, however, is not entirely clear. To address this issue, we inserted an intron in INO1, which is a nonintronic gene, and deleted the intron from ASC1, which contains a natural intron. We then compared transcription of INO1 and ASC1 genes in the presence and absence of an intron. Transcription of both genes was significantly stimulated by the intron. The introns have a direct role in enhancing transcription of INO1 and ASC1 because there was a marked increase in nascent transcripts from these genes in the presence of an intron. Intron-mediated enhancement of transcription required a splicing competent intron. Interestingly, both INO1 and ASC1 were in a looped configuration when their genes contained an intron. Intron-dependent gene looping involved a physical interaction of the promoter and the terminator regions. In addition, the promoter region interacted with the 5' splice site and the terminator with the 3' splice site. Intron-mediated enhancement of transcription was completely abolished in the looping defective sua7-1 strain. No effect on splicing, however, was observed in sua7-1 strain. On the basis of these results, we propose a role for gene looping in intron-mediated transcriptional activation of genes in yeast.