Cartilage-hair hypoplasia (CHH) is caused by mutations in the gene encoding the RNA component of RNase MRP. Currently it is unknown how these mutations affect the function of this endoribonuclease. In this study we investigated the effect of mutations in the P3 domain on protein binding and RNA folding. Our data demonstrate that a number of P3 nucleotide substitutions reduced the efficiency of its interaction with Rpp25 and Rpp20, two protein subunits binding as a heterodimer to this domain. The CHH-associated 40G>A substitution, as well as the replacement of residue 47, almost completely abrogated Rpp25 and Rpp20 binding in different assays. Also other CHH-associated P3 mutations reduced the efficiency by which the RNase MRP RNA is bound by Rpp25-Rpp20. These data demonstrate that the most important residues for binding of the Rpp25-Rpp20 dimer reside in the apical stem-loop of the P3 domain. Structural analyses by NMR not only showed that this loop may adopt a pseudo-triloop structure, but also demonstrated that the 40G>A substitution alters the folding of this part of the P3 domain. Our data are the first to provide insight into the molecular mechanism by which CHH-associated mutations affect the function of RNase MRP.