Tyrosyl-DNA-phosphodiesterase 1 (Tdp1) can disjoin peptides covalently bound to DNA. We assessed the role of Tdp1 in nonhomologous end joining (NHEJ) and found that linear DNA molecules with 5' extensions showed a high frequency of misrepair in Deltatdp1 cells. The joining errors in Deltatdp1 cells were predominantly 2-4 nucleotide insertions. Ends with 3' extensions or blunt ends did not show enhanced frequencies of errors, although Deltatdp1 cells repaired blunt DNA ends with greater efficiency than WT cells. We found that insertions required Ku80 and DNA ligase IV, as well as polymerase IV. Our results show that yeast Tdp1 is a component of the NHEJ pathway. We suggest that Tdp1p 3' nucleosidase activity regulates the processing of DNA ends by generating a 3' phosphate, thereby restricting the ability of polymerases and other enzymes from acting at DNA ends. In support of this model, we found that overexpression of Tpp1, a yeast DNA 3' phosphatase, also leads to a higher frequency of insertions, suggesting that the generation of a 3' phosphate is a key step in Tdp1-mediated error prevention during NHEJ.