MicroRNAs (miRNAs) are important post-transcriptional regulators of gene expression that act by direct base pairing to target sites within untranslated regions of messenger RNAs1. Recently, miRNA activity has been shown to be affected by the presence of miRNA sponge transcripts, the so-called competing endogenous RNA in humans and target mimicry in plants2,3,4,5,6,7. We previously identified a highly expressed circular RNA (circRNA) in human and mouse brain8. Here we show that this circRNA acts as a miR-7 sponge; we term this circular transcript ciRS-7 (circular RNA sponge for miR-7). ciRS-7 contains more than 70 selectively conserved miRNA target sites, and it is highly and widely associated with Argonaute (AGO) proteins in a miR-7-dependent manner. Although the circRNA is completely resistant to miRNA-mediated target destabilization, it strongly suppresses miR-7 activity, resulting in increased levels of miR-7 targets. In the mouse brain, we observe overlapping co-expression of ciRS-7 and miR-7, particularly in neocortical and hippocampal neurons, suggesting a high degree of endogenous interaction. We further show that the testis-specific circRNA, sex-determining region Y (Sry)9, serves as a miR-138 sponge, suggesting that miRNA sponge effects achieved by circRNA formation are a general phenomenon. This study serves as the first, to our knowledge, functional analysis of a naturally expressed circRNA.