The somatic genome of the ciliated protist Tetrahymena undergoes DNA elimination of defined sequences called internal eliminated sequences (IESs), which account for ~30% of the germline genome. During DNA elimination, IES regions are heterochromatinized and assembled into heterochromatin bodies in the developing somatic nucleus. The domesticated piggyBac transposase Tpb2p is essential for the formation of heterochromatin bodies and DNA elimination. In this study, we demonstrate that the activities of Tpb2p involved in forming heterochromatin bodies and executing DNA elimination are genetically separable. The cysteine-rich domain of Tpb2p, which interacts with the heterochromatin-specific histone modifications, is necessary for both heterochromatin body formation and DNA elimination, whereas the endonuclease activity of Tpb2p is only necessary for DNA elimination. Furthermore, we demonstrate that the endonuclease activity of Tpb2p in vitro and the endonuclease activity that executes DNA elimination in vivo have similar substrate sequence preferences. These results strongly indicate that Tpb2p is the endonuclease that directly catalyzes the excision of IESs and that the boundaries of IESs are at least partially determined by the combination of Tpb2p-heterochromatin interaction and relaxed sequence preference of the endonuclease activity of Tpb2p.