Mobile genetic elements threaten genome integrity in all organisms. RDE-3 (also known as MUT-2) is a ribonucleotidyltransferase that is required for transposon silencing and RNA interference in Caenorhabditis elegans1-4. When tethered to RNAs in heterologous expression systems, RDE-3 can add long stretches of alternating non-templated uridine (U) and guanosine (G) ribonucleotides to the 3' termini of these RNAs (designated poly(UG) or pUG tails)5. Here we show that, in its natural context in C. elegans, RDE-3 adds pUG tails to targets of RNA interference, as well as to transposon RNAs. RNA fragments attached to pUG tails with more than 16 perfectly alternating 3' U and G nucleotides become gene-silencing agents. pUG tails promote gene silencing by recruiting RNA-dependent RNA polymerases, which use pUG-tailed RNAs (pUG RNAs) as templates to synthesize small interfering RNAs (siRNAs). Our results show that cycles of pUG RNA-templated siRNA synthesis and siRNA-directed pUG RNA biogenesis underlie double-stranded-RNA-directed transgenerational epigenetic inheritance in the C. elegans germline. We speculate that this pUG RNA-siRNA silencing loop enables parents to inoculate progeny against the expression of unwanted or parasitic genetic elements.