DNA polymerase III holoenzyme is the major replicative enzyme in Escherichia coli. An important component of the high-fidelity DNA synthesis that is characteristic of DNA polymerase III holoenzyme is the 3'-->5' proofreading exonuclease activity resident in the epsilon subunit. Steady state and pre-steady state conditions have been used to determine equilibrium and Michaelis constants for substrate binding and the rate constant for cleavage by purified epsilon subunit. The steady state kinetic constants are K(m) = 16 +/- 6 microM and kcat = 210 +/- 23 s-1 for degradation of single-stranded DNA by epsilon. These steady state values are in agreement with the rate constants determined for excision of the 3' nucleotide of a dT10 oligomer under pre-steady state conditions. Using a simple two-step model, E + Dn reversible E.Dn-->E + Dn-1, we find K = 12 microM and kf = 280 s-1 for the dT10 substrate. In these experiments, epsilon subunit acts in a distributive manner and product release is not the rate-limiting step. Activity of the epsilon subunit on paired DNA oligonucleotides with zero to three mismatches at the 3' terminus indicates that an additional step is required in the mechanism. In the scheme Dn reversible Dn* + E reversible E.Dn*-->E + Dn-1, the 3' terminus undergoes a conformational change or "melts" before the DNA is a substrate for epsilon subunit. With this additional step, the values for binding of activated substrate and cleavage are the same as those for single-stranded DNA. The kinetics for exonucleolytic degradation of single-stranded, paired, and mispaired oligonucleotides support the model that the rate-limiting step in exonucleolytic proofreading of DNA by epsilon subunit is the DNA-melting step.