It has been suggested that gene silencing evolved as a defense against genomic parasites such as transposons. This idea is based on analysis of mutations that reactivate transposons that are stably silenced: they affect maintenance rather than initiation of silencing. Here we describe the cloning and characterization of a naturally occurring locus able to heritably silence the otherwise highly active MuDR transposon in maize. This locus, Mu killer (Muk), results from the inverted duplication of a partially deleted autonomous MuDR element located at the breakpoint of a genomic deletion. Muk produces a hybrid hairpin transcript that is processed into small RNAs, which are amplified when the target MuDR transcript is present. Muk provides the first example of a naturally occurring transposon derivative capable of initiating the heritable silencing of an active transposon family. Further, transposon-generated inverted duplications may be important for the generation of double-stranded RNAs used in gene silencing.