Half of hereditary nonpolyposis colon cancer kindreds harbor mutations that inactivate MutLalpha (MLH1*PMS2 heterodimer). MutLalpha is required for mismatch repair, but its function in this process is unclear. We show that human MutLalpha is a latent endonuclease that is activated in a mismatch-, MutSalpha-, RFC-, PCNA-, and ATP-dependent manner. Incision of a nicked mismatch-containing DNA heteroduplex by this four-protein system is strongly biased to the nicked strand. A mismatch-containing DNA segment spanned by two strand breaks is removed by the 5'-to-3' activity of MutSalpha-activated exonuclease I. The probable endonuclease active site has been localized to a PMS2 DQHA(X)(2)E(X)(4)E motif. This motif is conserved in eukaryotic PMS2 homologs and in MutL proteins from a number of bacterial species but is lacking in MutL proteins from bacteria that rely on d(GATC) methylation for strand discrimination in mismatch repair. Therefore, the mode of excision initiation may differ in these organisms.