LTR retrotransposons are often the most abundant components of plant genomes and can impact gene and genome evolution. Most reported LTR retrotransposons are large elements (>4 kb) and are most often found in heterochromatic (gene poor) regions. We report the smallest LTR retrotransposon found to date, only 292 bp. The element is found in rice, maize, sorghum and other grass genomes, which indicates that it was present in the ancestor of grass species, at least 50–80 MYA. Estimated insertion times, comparisons between sequenced rice lines, and mRNA data indicate that this element may still be active in some genomes. Unlike other LTR retrotransposons, the small LTR retrotransposons (SMARTs) are distributed throughout the genomes and are often located within or near genes with insertion patterns similar to MITEs (miniature inverted repeat transposable elements). Our data suggests that insertions of SMARTs into or near genes can, in a few instances, alter both gene structures and gene expression. Further evidence for a role in regulating gene expression, SMART-specific small RNAs (sRNAs) were identified that may be involved in gene regulation. Thus, SMARTs may have played an important role in genome evolution and genic innovation and may provide a valuable tool for gene tagging systems in grass.