Genetic studies of adeno-associated virus (AAV) indicate that two AAV genes are required for viral DNA replication: the palindromic terminal repeat, which is the origin for DNA replication, and the rep gene, which codes for a family of at least four viral nonstructural proteins. To determine the biochemical function of the Rep proteins, we have purified the AAV Rep68 protein to apparent homogeneity. We find that it contains a site-specific and strand-specific endonuclease activity that specifically cuts the AAV origin at the terminal resolution site (TRS). The TRS endonuclease requires the presence of ATP for activity and becomes covalently attached to the 5' end at the cut site. In addition to the specific endonuclease activity, Rep68 also contains a DNA helicase activity. These results demonstrate that the large AAV Rep proteins have a direct role in AAV DNA replication; namely, they provide the activities required for the resolution of covalently joined AAV termini.