The crystal structure of the DNA polymerase encoded by gene 5 of bacteriophage T7, in a complex with its processivity factor, Escherichia coli thioredoxin, a primer-template, and an incoming deoxynucleoside triphosphate reveals a putative hydrogen bond between the C-terminal residue, histidine 704 of gene 5 protein, and an oxygen atom on the penultimate phosphate diester of the primer strand. Elimination of this electrostatic interaction by replacing His(704) with alanine renders the phage nonviable, and no DNA synthesis is observed in vivo. Polymerase activity of the genetically altered enzyme on primed M13 DNA is only 12% of the wild-type enzyme, and its processivity is drastically reduced. Kinetic parameters for binding a primer-template (K(D)(app)), nucleotide binding (K(m)), and k(off) for dissociation of the altered polymerase from a primer-template are not significantly different from that of wild-type T7 DNA polymerase. However, the decrease in polymerase activity is concomitant with increased hydrolytic activity, judging from the turnover of nucleoside triphosphate into the corresponding nucleoside monophosphate (percentage of turnover, 65%) during DNA synthesis. Biochemical data along with structural observations imply that the terminal amino acid residue of T7 DNA polymerase plays a critical role in partitioning DNA between the polymerase and exonuclease sites.