A crystal structure of the bacteriophage T7 gene 5 protein/Escherichia coli thioredoxin complex reveals a region in the exonuclease domain (residues 144-157) that is not present in other members of the E. coli DNA polymerase I family. To examine the role of this region, a genetically altered enzyme that lacked residues 144-157 (T7 polymerase (pol) Delta144-157) was purified and characterized biochemically. The polymerase activity and processivity of T7 pol Delta144-157 on primed M13 DNA are similar to that of wild-type T7 DNA polymerase implying that these residues are not important for DNA synthesis. The ability of T7 pol Delta144-157 to catalyze the hydrolysis of a phosphodiester bond, as judged from the rate of hydrolysis of a p-nitrophenyl ester of thymidine monophosphate, also remains unaffected. However, the 3'-5' exonuclease activity on polynucleotide substrates is drastically reduced; exonuclease activity on single-stranded DNA is 10-fold lower and that on double-stranded DNA is 20-fold lower as compared with wild-type T7 DNA polymerase. Taken together, our results suggest that residues 144-157 of gene 5 protein, although not crucial for polymerase activity, are important for DNA binding during hydrolysis of polynucleotides.