Packaging of viral genomes into preformed procapsids requires the controlled and synchronized activity of an ATPase and a genome-processing nuclease, both located in the large terminase (L-terminase) subunit. In this paper, we have characterized the structure and regulation of bacteriophage P22 L-terminase (gp2). Limited proteolysis reveals a bipartite organization consisting of an N-terminal ATPase core flexibly connected to a C-terminal nuclease domain. The 2.02 Å crystal structure of P22 headful nuclease obtained by in-drop proteolysis of full-length L-terminase (FL-L-terminase) reveals a central seven-stranded β-sheet core that harbors two magnesium ions. Modeling studies with DNA suggest that the two ions are poised for two-metal ion-dependent catalysis, but the nuclease DNA binding surface is sterically hindered by a loop-helix (L(1)-α(2)) motif, which is incompatible with catalysis. Accordingly, the isolated nuclease is completely inactive in vitro, whereas it exhibits endonucleolytic activity in the context of FL-L-terminase. Deleting the autoinhibitory L(1)-α(2) motif (or just the loop L(1)) restores nuclease activity to a level comparable with FL-L-terminase. Together, these results suggest that the activity of P22 headful nuclease is regulated by intramolecular cross-talk with the N-terminal ATPase domain. This cross-talk allows for precise and controlled cleavage of DNA that is essential for genome packaging.