During budding of vesicular stomatitis virus (VSV), the viral matrix (M) protein binds the viral nucleocapsid to the host plasma membrane and condenses the nucleocapsid into the tightly coiled nucleocapsid-M protein (NCM) complex observed in virions. In infected cells, the viral M protein exists mostly as a soluble molecule in the cytoplasm, and a small amount is bound to the plasma membrane. Despite the high concentrations of M protein and intracellular nucleocapsids in the cytoplasm, they are not associated with each other except at the sites of budding. The experiments presented here address the question of why M protein and nucleocapsids associate with each other only at the plasma membrane but not in the cytoplasm of infected cells. An assay for exchange of soluble M protein into NCM complexes in vitro was used to show that both cytosolic and membrane-derived M proteins bound to virion NCM complexes with affinities similar to that observed for virion M protein, indicating that both cytosolic and membrane-derived M proteins are competent for virus assembly. However, neither cytosolic nor membrane-derived M protein bound to intracellular nucleocapsids with the same high affinity observed for virion NCM complexes. Cytosolic M protein was able to bind intracellular nucleocapsids, but with an affinity approximately eightfold less than that observed in virion NCM complexes. Membrane-derived M protein exhibited little or no binding activity for intracellular nucleocapsids. These data indicate that intracellular nucleocapsids, and not intracellular M proteins, need to undergo an assembly-initiating event in order to assemble into an NCM complex. Since neither membrane-derived nor cytosolic M protein could initiate high-affinity binding to intracellular nucleocapsids, the results suggest that another viral or host factor is required for assembly of the NCM complex observed in virions.