Bacteriophage T7 lysozyme binds to T7 RNA polymerase (RNAP) and regulates its transcription by differentially repressing initiation from different T7 promoters. This selective repression is due in part to a lysozyme-induced increase in the KNTP of the initiation complex (IC) and to intrinsically different NTP concentration requirements for efficient initiation from different T7 promoters. While lysozyme represses initiation, once the enzyme has left the promoter and formed an elongation complex (EC) it is generally resistant to the effects of lysozyme. The mechanism by which the inhibitory effects of lysozyme are largely restricted to the initiation phase of transcription is not well understood. We find that T7 lysozyme destabilizes initial transcription complexes (ITCs) and increases the rate of release of transcripts from these complexes but does not destabilize ECs. However, if the RNA:RNAP interaction proposed to be important for EC stability is disrupted by proteolysis of the RNA-binding domain or use of templates which interfere with establishment of this RNA:RNAP interaction, the EC becomes sensitive to lysozyme. Comparison of the X-ray structures of T7RNAP and of a T7RNAP:T7 lysozyme complex reveals that lysozyme causes the C terminus of the polymerase to flip out of the active site. Experiments in which carboxypeptidase A is used to probe the lysozyme-induced exposure of the C terminus reveal a large decrease in carboxypeptidase sensitivity following transcription initiation, suggesting that interactions with the 3'-end of the RNA help stabilize the active site in a functional (carboxypeptidase protected) conformation. Thus, the resistance of the EC to lysozyme appears to be due to the consecutive establishment of two sets of RNA:RNAP interactions. The first is made with the 3'-end of the RNA and helps stabilize a functional conformation of the active site, thereby suppressing the effects of lysozyme on KNTP. The second is made with a more upstream element of the RNA and keeps the EC from being destabilized by lysozyme binding.