To better understand the mechanism by which Ty1 RNase H creates the polypurine tract (PPT) primer, we have demonstrated the polymerase-dependent hydrolytic activity of Ty1 reverse transcriptase (RT) during minus-strand synthesis. Using RNase H and polymerase mutants of the recombinant Ty1 RT protein, we show that the two domains of Ty1 RT can act independently of one another. Our results indicate that RNA/DNA substrates containing a short RNA PPT, which serve as primers for plus-strand DNA synthesis, are relatively resistant to RNase H cleavage. RNA substrates with a correct 5' end but with 3' end extending beyond the plus-strand initiation site were cleaved specifically to generate the correct 3' end of the PPT. Using long RNA/DNA duplexes containing the PPT, we show that Ty1 RT is able to make specific internal cleavages that could generate the plus-strand primer with correct 5' and 3' ends. Long RNA/DNA duplexes with mutations in the PPT or in a U-rich region upstream of the PPT, which abolish plus-strand initiation in vivo, were not cleaved specifically at the 5' end of the PPT. Our work demonstrates that the in vitro enzyme can recapitulate key processes that control proper replication in vivo.