The capsid domain of the human immunodeficiency virus type 1 (HIV-1) Gag polyprotein is a critical determinant of virus assembly, and is therefore a potential target for developing drugs for AIDS therapy. Recently, a 12-mer alpha-helical peptide (CAI) was reported to disrupt immature- and mature-like capsid particle assembly in vitro; however, it failed to inhibit HIV-1 in cell culture due to its inability to penetrate cells. The same group reported the X-ray crystal structure of CAI in complex with the C-terminal domain of capsid (C-CA) at a resolution of 1.7 A. Using this structural information, we have utilized a structure-based rational design approach to stabilize the alpha-helical structure of CAI and convert it to a cell-penetrating peptide (CPP). The modified peptide (NYAD-1) showed enhanced alpha-helicity. Experiments with laser scanning confocal microscopy indicated that NYAD-1 penetrated cells and colocalized with the Gag polyprotein during its trafficking to the plasma membrane where virus assembly takes place. NYAD-1 disrupted the assembly of both immature- and mature-like virus particles in cell-free and cell-based in vitro systems. NMR chemical shift perturbation analysis mapped the binding site of NYAD-1 to residues 169-191 of the C-terminal domain of HIV-1 capsid encompassing the hydrophobic cavity and the critical dimerization domain with an improved binding affinity over CAI. Furthermore, experimental data indicate that NYAD-1 most likely targets capsid at a post-entry stage. Most significantly, NYAD-1 inhibited a large panel of HIV-1 isolates in cell culture at low micromolar potency. Our study demonstrates how a structure-based rational design strategy can be used to convert a cell-impermeable peptide to a cell-permeable peptide that displays activity in cell-based assays without compromising its mechanism of action. This proof-of-concept cell-penetrating peptide may aid validation of capsid as an anti-HIV-1 drug target and may help in designing peptidomimetics and small molecule drugs targeted to this protein.