RNA interference (RNAi) offers a powerful tool to specifically direct the degradation of complementary RNAs, and thus has great therapeutic potential for targeting diseases. Despite the reported preferences of RNAi, there is still a need for new techniques that will allow for a detailed mechanistic characterization of RNA-induced silencing complex (RISC) assembly and activity to further improve the biocompatibility of modified siRNAs. In contrast to previous reports, we investigated the effects of 2′-O-methyl (2′OMe) modifications introduced at specific positions within the siRNA at the early and late stages of RISC assembly, as well as their influence on target recognition and cleavage directly in living cells. We found that six to 10 2′OMe nucleotides on the 3′-end inhibit passenger-strand release as well as target-RNA cleavage without changing the affinity, strand asymmetry, or target recognition. 2′OMe modifications introduced at the 5′-end reduced activated RISC stability, whereas incorporations at the cleavage site showed only minor effects on passenger-strand release when present on the passenger strand. Our new fluorescence cross-correlation spectroscopy assays resolve different steps and stages of RISC assembly and target recognition with heretofore unresolved detail in living cells, which is needed to develop therapeutic siRNAs with optimized in vivo properties.