BACKGROUND: Bluetongue virus (BTV) particles consist of seven structural proteins that are organized into two capsids. In addition, BTV also encodes three non-structural (NS) proteins of which protein 2 (NS2) is the RNA binding protein and is also the major component of virus encoded inclusion bodies (VIBs), which are believed to be virus assembly sites. To investigate the contribution of NS2 in virus replication and assembly we have constructed inducible mammalian cell lines expressing full-length NS2. In addition, truncated NS2 fragments were also generated in an attempt to create dominant negative mutants for NS2 function. RESULTS: Our data revealed that expression of full-length NS2 was sufficient for the formation of inclusion bodies (IBs) that were morphologically similar to the VIBs formed during BTV infection. By using either, individual BTV proteins or infectious virions, we found that while the VP3 of the inner capsid (termed as "core") that surrounds the transcription complex was closely associated with both NS2 IBs and BTV VIBs, the surface core protein VP7 co-localized with NS2 IBs only in the presence of VP3. In contrast to the inner core proteins, the outer capsid protein VP2 was not associated with either IBs or VIBs. Like the core proteins, newly synthesized BTV RNAs also accumulated in VIBs. Unlike full-length NS2, neither the amino-, nor carboxyl-terminal fragments formed complete IB structures and each appeared to interfere in overall virus replication when similarly expressed. CONCLUSION: Together, these data demonstrate that NS2 is sufficient and necessary for IB formation and a key player in virus replication and core assembly. Perturbation of NS2 IB formation resulted in reduced virus synthesis and both the N terminal (NS2-1) and C terminal (NS2-2) fragments act as dominant negative mutants of NS2 function.