RNA interference is widely distributed in eukaryotes and has a variety of functions, including antiviral defence and gene regulation(1,2). All RNA interference pathways use small single-stranded RNA(ssRNA) molecules that guide proteins of the Argonaute (Ago) family to complementary ssRNA targets: RNA-guided RNA interference(1,2). The role of prokaryotic Ago variants has remained elusive, although bioinformatics analysis has suggested their involvement in host defence(3). Here we demonstrate that Ago of the bacterium Thermus thermophilus (TtAgo) acts as a barrier for the uptake and propagation of foreign DNA. In vivo, TtAgo is loaded with 5'-phosphorylated DNA guides, 13-25 nucleotides in length, that are mostly plasmid derived and have a strong bias for a 5'-end deoxycytidine. These small interfering DNAs guide TtAgo to cleave complementary DNA strands. Hence, despite structural homology to its eukaryotic counterparts, TtAgo functions in host defence by DNA-guided DNA interference.