Cytosine arabinoside (araC) is a potent antileukemic agent which interferes with DNA replication both as a dNTP competitive inhibitor as well as after its misincorporation into DNA. We previously developed a chemical methodology for the synthesis of DNA oligomers containing araC which allowed us to study its site specific effects on duplex stability and chemical reactivity [Beardsley, G. P., Mikita, T., Klaus, M., & Nussbaum, A. (1988) Nucleic Acids Res. 16, 9165], as well as its effects on DNA ligase and DNA polymerase activity [Mikita, T., & Beardsley, G. P. (1988) Biochemistry 27, 4698]. The DNA polymerase studies, in addition to other observations, showed that araC in DNA templates could have an inhibitory effect on polymerase bypass. As a template lesion, there exists the potential for interference with other aspects of DNA metabolism, such as transcription. We have characterized a DNA/RNA hybrid containing an araC-G base pair, comparing thermal stability, chemical cleavage rates, and duplex gel mobility to an identically sequenced DNA duplex. We find that the A-form DNA/RNA hybrid and the B-form DNA duplex are nearly identical in the extent their thermal stability is affected by an araC-G(dG) base pair. Substitutions of araC for dC were made at various positions in a series of DNA duplex substrates containing a T7 RNA polymerase promoter with variable length coding strands. These were used to probe the effect of araC on promoter recognition, initiation, and elongation by T7 RNA polymerase in vitro. Substitutions in the central promoter region had no observable effect on RNA polymerase binding, initiation rate, or transcriptional output. Coding strand substitutions defined an area of high sensitivity in the initiation region where miss-starts, primer slippage, and an inability to escape from abortive cycling occur depending on the position substituted. Substitutions after position 10 had little effect on transcription output. These highly variable, position dependent effects indicate a narrow window of vulnerability where transcription output is severely reduced (approximately 100-fold) by a subtle DNA lesion that has little or no consequence when situated elsewhere in these small coding units.