Saccharomyces cerevisiae mitochondrial DNA polymerase (Mip1) contains a C-terminal extension (CTE) of 279 amino acid residues. The CTE is required for mitochondrial DNA maintenance in yeast but is absent in higher eukaryotes. Here we use recombinant Mip1 C-terminal deletion mutants to investigate functional importance of the CTE. We show that partial removal of the CTE in Mip1Δ216 results in strong preference for exonucleolytic degradation rather than DNA polymerization. This disbalance in exonuclease and polymerase activities is prominent at suboptimal dNTP concentrations and in the absence of correctly pairing nucleotide. Mip1Δ216 also displays reduced ability to synthesize DNA through double-stranded regions. Full removal of the CTE in Mip1Δ279 results in complete loss of Mip1 polymerase activity, however the mutant retains its exonuclease activity. These results allow us to propose that CTE functions as a part of Mip1 polymerase domain that stabilizes the substrate primer end at the polymerase active site, and is therefore required for efficient mitochondrial DNA replication in vivo.