Sponsored news is a form of native advertising that has engendered much hope as a solution for digital publishing revenue woes, but also much concern about whether the average consumer can discern its advertising nature. Recent U.S. federal guidelines and industry recommendations preach clear and conspicuous labeling of sponsored news articles, but little is known about how individual readers interpret these labels, and how their interpretation shapes their understanding of article content. The present study contributes knowledge to the former areas by presenting the results of a between-subjects experiment (N = 343) that tested the effects of four disclosure characteristics (proximity, visual prominence, wording clarity, and logo presence) on recognition of the sponsored content as advertising, and by analyzing the psychological process through which such recognition influences perceptions of the article and the sponsor. The results show that while logo presence and visual prominence increase the odds of recognition, logo presence also increases misperception of the disclosure label as a stand-alone display advertisement. Recognition of the article as advertising led to decreased perceptions of article quality, attitude toward the sponsor, and intent to share the article. A serial mediation analysis shows that the effects of recognition on attitudes and intent to share are primarily mediated through conceptual persuasion knowledge activation and perceived deceptiveness of the article. Implications of these findings for practitioners and for the application of persuasion theories to covert advertising are discussed.