© The Author(s) 2018. Published by Oxford University Press on behalf of Nucleic Acids Research. The L proteins of rhabdoviruses, such as vesicular stomatitis virus (VSV) and rabies virus (RABV), possess an unconventional mRNA capping enzyme (GDP polyribonucleotidyltransferase, PRNTase) domain with a loop structure protruding into an active site cavity of the RNA-dependent RNA polymerase (RdRp) domain. Here, using complementary VSV and RABV systems, we show that the loop governs RNA synthesis and capping during the dynamic stop-start transcription cycle. A conserved tryptophan residue in the loop was identified as critical for terminal de novo initiation from the genomic promoter to synthesize the leader RNA and virus replication in host cells, but not for internal de novo initiation or elongation from the gene-start sequence for mRNA synthesis or pre-mRNA capping. The co-factor P protein was found to be essential for both terminal and internal initiation. A conserved Txφ motif adjacent the tryptophan residue in the loop was required for pre-mRNA capping in the step of the covalent enzyme-pRNA intermediate formation, but not for either terminal or internal transcription initiation. These results provide insights into the regulation of stop-start transcription by the interplay between the RdRp active site and the dual-functional priming-capping loop of the PRNTase domain in non-segmented negative strand RNA viruses.