The Saccharomyces cerevisiae retroviruslike element Ty3 encodes the major structural proteins capsid (CA) and nucleocapsid in the GAG3 open reading frame. The Ty3 CA protein contains a sequence (QGX2EX5FX3LX3H, where H is a hydrophobic residue) which has not been observed in other retrotransposons but which is similar to the major homology region (MHR) described for retrovirus CA. In this study the effects of mutations in the Ty3 MHR on particle formation, processing, DNA synthesis, and transposition were examined. Each of the mutations tested resulted in severe defects in transposition, with disruption occurring prior to or at particle formation, subsequent to particle formation and prior to completion of DNA synthesis, and subsequent to DNA synthesis. Changing the Q in the motif to R had relatively little effect on particle formation but decreased transposition to about 13% of that of a wild-type element. Changing G to A or V almost completely eliminated the formation of intracellular particles, possibly by disruption of CA-CA interactions. Changes introduced at the position of E resulted in blocked processing, blocked DNA synthesis, or a block at some post-reverse transcription step, depending on the nature of the mutation introduced. These results showed that the integrity of the Ty3 MHR is required for multiple aspects of Ty3 replication involving CA. These functions are independent of extracellular budding and of infection, aspects of the retroviral life cycle which are not recapitulated in replication of the Ty3 retrotransposon.