DNA methylation is an important epigenetic mark for transcriptional gene silencing (TGS) in diverse organisms. Recent studies suggest that the methylation status of a number of genes is dynamically regulated by methylation and demethylation. In Arabidopsis, active DNA demethylation is mediated by the ROS1 (repressor of silencing 1) subfamily of 5-methylcytosine DNA glycosylases through a base excision repair pathway. These demethylases have critical roles in erasing DNA methylation and preventing TGS of target genes. However, it is not known how the demethylases are targeted to specific sequences. Here we report the identification of ROS3, an essential regulator of DNA demethylation that contains an RNA recognition motif. Analysis of ros3 mutants and ros1 ros3 double mutants suggests that ROS3 acts in the same genetic pathway as ROS1 to prevent DNA hypermethylation and TGS. Gel mobility shift assays and analysis of ROS3 immunoprecipitate from plant extracts shows that ROS3 binds to small RNAs in vitro and in vivo. Immunostaining shows that ROS3 and ROS1 proteins co-localize in discrete foci dispersed throughout the nucleus. These results demonstrate a critical role for ROS3 in preventing DNA hypermethylation and suggest that DNA demethylation by ROS1 may be guided by RNAs bound to ROS3.