Circular RNAs (circRNAs) are widely expressed noncoding RNAs. However, their biogenesis and possible functions are poorly understood. Here, by studying circRNAs that we identified in neuronal tissues, we provide evidence that animal circRNAs are generated cotranscriptionally and that their production rate is mainly determined by intronic sequences. We demonstrate that circularization and splicing compete against each other. These mechanisms are tissue specific and conserved in animals. Interestingly, we observed that the second exon of the splicing factor muscleblind (MBL/MBNL1) is circularized in flies and humans. This circRNA (circMbl) and its flanking introns contain conserved muscleblind binding sites, which are strongly and specifically bound by MBL. Modulation of MBL levels strongly affects circMbl biosynthesis, and this effect is dependent on the MBL binding sites. Together, our data suggest that circRNAs can function in gene regulation by competing with linear splicing. Furthermore, we identified muscleblind as a factor involved in circRNA biogenesis.