Drosophila P transposable elements encode an 87 kd trans-acting protein, transposase, that is required to catalyze P element transposition and excision. We show here that purified transposase is a site-specific DNA binding protein. P element transposase does not interact with the terminal 31 bp inverted repeats but instead interacts specifically with an internal 10 bp consensus sequence present at both the 5' and 3' ends of P element DNA. These binding sites lie within sequences known to be important for transposition in vivo. Transposase also displays an unusually high nonspecific affinity for DNA. The transposase binding site at the 5' and overlaps sequences we show to be essential for transcription from the P element promoter in vitro, which raises the possibility that either transposase or the related 66 kd P element protein may affect P element transcription. From these and other observations, we suggest that the P element transposition reaction probably requires the binding of additional Drosophila protein factors to the terminal DNA sequences.