Tumor formation by Agrobacterium tumefaciens involves the transfer and integration of a defined segment (T-DNA) of tumor-inducing (Ti) plasmid DNA into the plant nuclear genome. A set of plasmid genes outside the T-DNA, the vir genes, are thought to mediate the transfer process. We report here that the virD operon encodes a site-specific endonuclease that cleaves at a unique site within each of the 24 bp direct repeats that flank the T-DNA. The endonuclease function was further localized to the 5' end of this operon by demonstrating that cleavage does not occur in virD mutant strains of Agrobacterium and that the 5' end of the virD operon is sufficient to direct cleavage in E. coli. Analysis of nucleotide sequence and protein data indicate that two proteins of 16.2 and 47.4 kd are involved.