The product of the td intron open reading frame (ORF) of phage T4 is required for high-frequency transfer of the intervening sequence from intron-plus (In+) to intron-minus (In-) alleles. In vivo studies have demonstrated that the td ORF product targets cleavage of td In- DNA, and that cleavage is correlated with intron inheritance [Quirk et al., Cell 56 (1989) 455-465]. In the present study we show by in vitro synthesis of the td intron ORF product, that the protein possesses endonuclease activity and efficiently cleaves double-stranded DNA at or near the site of intron integration. In addition, we demonstrate that intron insertion is accompanied by co-conversion of the flanking exon sequences. Co-conversion of markers within 50 nt surrounding the site of intron insertion occurred at a high frequency (80-100%), and decreased at greater distance from the intervening sequence. Co-conversion may provide a mechanism for maintaining exon-intron RNA contacts required for accurate splicing of the relocated intron. Cleavage of target DNA by an intron endonuclease and co-conversion of flanking exon sequences are both features associated with mobile introns of eukaryotes, indicating a common mechanism for intron transfer in the eukaryotic and prokaryotic kingdoms.