Many taxonomically diverse prokaryotes enzymatically modify their DNA by replacing a non-bridging oxygen with a sulfur atom at specific sequences. The biological implications of this DNA S-modification (phosphorothioation) were unknown. We observed that simultaneous expression of the dndA-E gene cluster from Streptomyces lividans 66, which is responsible for the DNA S-modification, and the putative Streptomyces coelicolor A(3)2 Type IV methyl-dependent restriction endonuclease ScoA3McrA (Sco4631) leads to cell death in the same host. A His-tagged derivative of ScoA3McrA cleaved S-modified DNA and also Dcm-methylated DNA in vitro near the respective modification sites. Double-strand cleavage occurred 16-28 nucleotides away from the phosphorothioate links. DNase I footprinting demonstrated binding of ScoA3McrA to the Dcm methylation site, but no clear binding could be detected at the S-modified site under cleavage conditions. This is the first report of in vitro endonuclease activity of a McrA homologue and also the first demonstration of an enzyme that specifically cleaves S-modified DNA.