McrA is one of three functions that restrict modified foreign DNA in Escherichia coli K-12, affecting both methylated and hydroxymethylated substrates. We present here the first systematic analysis of the functional organization of McrA by using the GPS-LS insertion scanning system. We collected in-frame insertions of five amino acids at 46 independent locations and C-terminal truncations at 20 independent locations in the McrA protein. Each mutant was assayed for in vivo restriction of both methylated and hydroxymethylated bacteriophage (M.HpaII-modified lambda and T4gt, respectively) and for induction of the E. coli SOS response in the presence of M.HpaII methylation, indicative of DNA damage. Our findings suggest the presence of an N-terminal DNA-binding domain and a C-terminal catalytic nuclease domain connected by a linker region largely tolerant of amino acid insertions. DNA damage inflicted by a functional C-terminal domain is required for restriction of phage T4gt. Disruption of the N-terminal domain abolishes restriction of both substrates. Surprisingly, truncation mutations that spare the N-terminal domain do not mediate DNA damage, as measured by SOS induction, but nevertheless partially restrict M.HpaII-modified lambda in vivo. We suggest a common explanation for this "restriction without damage" and a similar observation seen in vivo with McrB, a component of another of the modified-DNA restriction functions. Briefly, we propose that unproductive site-specific binding of the protein to a vulnerable position in the lambda genome disrupts the phage development program at an early stage. We also identified a single mutant, carrying an insertion in the N-terminal domain, which could fully restrict lambda but did not restrict T4gt at all. This mutant may have a selective impairment in substrate recognition, distinguishing methylated from hydroxymethylated substrates. The study shows that the technically easy insertion scanning method can provide a rich source of functional information when coupled with effective phenotype tests.