In order to determine the mechanism and enzyme(s) responsible for 3' processing of tRNA precursors, we have developed an in vitro processing system that uses as substrates two SP6 RNA polymerase-generated transcripts of the gene for tRNA(Tyrsu3)+ that contain 49 extra 5'-nucleotides and either 5 or 25 extra 3'-nucleotides. A high speed supernatant fraction from an Escherichia coli strain deficient in five ribonucleases was found to accurately process both tRNA precursors in this system to the size of mature tRNA(Tyr). Final 3' end processing of each precursor occurs in an exonucleolytic manner to generate the correct 3' terminus; however, a prior endonucleolytic cleavage also is observed in processing of the longer precursor. The system requires Mg2+ and works optimally at about 50 mM KCl and pH 8-9. Dialysis of the supernatant fraction leads to loss of processing activity but can be restored to normal by the addition of inorganic phosphate or arsenate. Furthermore, nucleoside diphosphates are a product of the processing reaction. These data indicate that 3' processing in RNase-deficient extracts involves a phosphorolytic reaction. On the other hand, phosphate is not required for processing in RNase+ extracts, although it does aid in processing of the longer precursor. The usefulness of this in vitro system for studies of tRNA processing and the identity of the phosphate-requiring enzyme are discussed.