Recently, Breaker and coworkers engineered hammerhead ribozymes that rearrange from a catalytically inactive to an active conformation upon allosteric binding of a specific ligand. To monitor cleavage activity in real time, we have coupled a donor–acceptor fluorophore pair to the termini of the substrate RNA of such a hammerhead ribozyme, modified to cleave in trans in the presence of the bronchodilator theophylline. In the intact substrate, the fluorophores interact by fluorescence resonance energy transfer (FRET). The specific FRET signal breaks down as the effector ligand binds, the substrate is cleaved, and the products dissociate, with a rate constant dependent on the concentration of the ligand. Our biosensor cleaves substrate at 0.46 min−1 in 1 mM theophylline and 0.04 min−1 without effector, and discriminates against caffeine, a structural relative of theophylline. We have measured the theophylline-dependence profile of this biosensor, showing that concentrations as low as 1 μM can be distinguished from background. To probe the mechanism of allosteric regulation, a single nucleotide in the communication domain between the catalytic and ligand-binding domains was mutated to destabilize the inactive conformation of the ribozyme. As predicted, this mutant shows the same activity (0.3 min−1) in the presence and absence of theophylline. Additionally, time-resolved FRET measurements on the biosensor ribozyme in complex with a noncleavable substrate analog reveal no significant changes in fluorophore distance distribution upon binding of effector.