T20, a synthetic peptide corresponding to a C-terminal segment of the envelope glycoprotein (gp41) of human and simian immunodeficiency viruses, is a potent inhibitor of viral infection. We report here that C-terminal octylation of simian immunodeficiency virus gp41-derived T20 induces a significant increase in its inhibitory potency. Furthermore, when C-terminally octylated, an otherwise inactive mutant in which the C-terminal residues GNWF were replaced by ANAA has potency similar to that of the wild type T20. This effect cannot be explained by a trivial inhibitory effect of the octyl group added to the peptides, because the N-terminally octylated peptides have the same activity as the non-octylated parent peptides. The effects caused by octylation on the oligomerization, secondary structure, and membrane-interaction properties of the peptides were investigated. Our results shed light on the mechanism of inhibition by T20 and provide experimental support for the existence of a pre-hairpin intermediate.