Polymerase eta is a member of the Y family of DNA polymerases which is able to bypass thymine dimers efficiently and in a relatively error-free manner. To elucidate the mechanism of dimer bypass, the efficiency of dAMP and pyrene nucleotide insertion opposite the thymine dimer and its N3-methyl derivatives was determined. Pol eta inserts pyrene nucleotide with greater efficiency than dAMP opposite the 3'-T of an undimerized or dimerized T and is an effective inhibitor of DNA synthesis by pol eta. Substitution of the N3H of the 3'-T of an undimerized T or a dimerized T with a methyl group has little effect on the insertion efficiency of pyrene nucleotide but greatly inhibits the insertion of dAMP. Together, these results suggest that the error-free insertion of dAMP opposite the 3'-T of the cis-syn thymine dimer happens by way of a loosely held dimer in the active site which can be displaced from the active site by pyrene nucleotide. In contrast, pol eta cannot insert pyrene nucleotide opposite the 5'-T of the dimer, whereas it can insert dAMP with efficiency comparable to that opposite the 3'-T. The inability to insert pyrene nucleotide opposite the 5'-T of the dimer is consistent with the idea that while the polymerase binds loosely to a templating nucleotide, it binds tightly to the nucleotide to its 3'-side. Overall, the results show a marked difference from similar studies on pol I family polymerases, and suggest mechanisms by which this Y family polymerase can process damaged DNA efficiently.