A mispair-specific 3'-->5' exonuclease copurifies quantitatively with the near-homogeneous Drosophila gamma polymerase (Kaguni, L.S., and Olson, M.W. (1989) Proc. Natl. Acad. Sci. U.S.A. 86, 6469-6473). The exonuclease and polymerase exhibit similar reaction requirements and optima, suggesting functional coordination of their activities. Under nonpolymerization conditions, the 3'-->5' exonuclease hydrolyzes 3'-terminal mispairs approximately 15-fold more efficiently than 3'-terminal base pairs on primed single-stranded DNA substrates, whereas it does not discriminate between any of three specific mispairs (dAMP:dAMP;dGMP:dGMP; dGMP:dAMP). Under polymerization conditions, gamma polymerase does not extend a 3'-terminal mispair from the "stationary" state, even in the presence of a large excess of the next correct nucleotide. Instead, 3'-terminal mispairs are hydrolyzed quantitatively by the 3'-->5' exonuclease over the reaction time course. During DNA synthesis by gamma polymerase in the "polymerization" mode, limited misincorporation and subsequent mispair extension do occur. Here, it appears that misincorporation and not mispair extension is rate-limiting. Template-primer challenge experiments suggest that the mechanism of template-primer transfer from the 3'-->5' exonuclease active site to the DNA polymerase active site is intermolecular; transfer from the exonuclease to polymerase mode appears to require dissociation and reassociation of mitochondrial DNA polymerase.