We developed in vitro assays to study the first step of the P-element transposition reaction: donor DNA cleavage. We found that P-element transposase required both 5' and 3' P-element termini for efficient DNA cleavage to occur, suggesting that a synaptic complex forms prior to cleavage. Transposase made a staggered cleavage at the P-element termini that is novel for all known site-specific endonucleases: the 3' cleavage site is at the end of the P-element, whereas the 5' cleavage site is 17 bp within the P-element 31-bp inverted repeats. The P-element termini were protected from exonucleolytic degradation following the cleavage reaction, suggesting that a stable protein complex remains bound to the element termini after cleavage. These data are consistent with a cut-and-paste mechanism for P-element transposition and may explain why P elements predominantly excise imprecisely in vivo.