Short hairpin RNAs (shRNAs) are widely used to induce RNA interference (RNAi). We tested a variety of shRNAs that differed in stem length and terminal loop size and revealed strikingly different RNAi activities and shRNA-processing patterns. Interestingly, we identified a specific shRNA design that uses an alternative Dicer-independent processing pathway. Detailed analyses indicated that a short shRNA stem length is critical for avoiding Dicer processing and activation of the alternative processing route, in which the shRNA is incorporated into RISC and processed by the AGO2-mediated slicer activity. Such alternatively processed shRNAs (AgoshRNAs) yield only a single RNA strand that effectively induces RNAi, whereas conventional shRNA processing results in an siRNA duplex of which both strands can trigger RNAi. Both the processing and subsequent RNAi activity of these AgoshRNAs are thus mediated by the RISC-component AGO2. These results have important implications for the future design of more specific RNAi therapeutics.