Biogenesis of small interfering RNAs (siRNA) in Drosophila melanogaster involves the processing of double-stranded RNA (dsRNA) by Dcr-2 with Loqs-PD/R2D2 and Ago2. Here, we show that Loqs-PD and Ago2 are found in biomolecular condensates in vivo and display liquid-liquid phase separation in vitro. The phase separation of Loqs-PD depends on the RNA-binding capability of its double-stranded RNA-binding domains and is further modulated by the preceding N-terminal region. An intrinsically disordered region in Ago2 (Ago2IDR) forms condensates in the presence of RNA in vitro. Combining NMR spectroscopy and mutational analysis, we show that Ago2IDR/RNA condensates are fluid, with significant polypeptide backbone flexibility, and are stabilized by a dense network of interactions involving arginine and aromatic side chains. Co-partitioning of Loqs-PD into Ago2IDR/dsRNA condensates depends on its ability to bind RNA. An RNase III enzyme can act on Ago2IDR/dsRNA condensates and reduce phase separation. Our results indicate that the unique features of the Ago2 IDR, which are broadly conserved in arthropods, drive biomolecular condensate formation, suggesting that phase separation plays a role in siRNA processing in Drosophila, potentially tuning the efficiency of dsRNA-mediated antiviral defense.