The Saccharomyces cerevisiae RAD27 gene encodes the yeast homologue of the mammalian FEN-1 nuclease, a protein that is thought to be involved in the processing of Okazaki fragments during DNA lagging-strand synthesis. One of the predicted DNA lesions occurring in rad27 strains is the presence of single-stranded DNA of the template strand for lagging-strand synthesis. We examined this prediction by analyzing the terminal DNA structures generated during telomere replication in rad27 strains. The lengths of the telomeric repeat tracts were found to be destabilized in rad27 strains, indicating that naturally occurring direct repeats are subject to tract expansions and contractions in such strains. Furthermore, abnormally high levels of single-stranded DNA of the templating strand for lagging-strand synthesis were observed in rad27 cells. Overexpression of Dna2p in wild-type cells also yielded single-stranded DNA regions on telomeric DNA and caused a cell growth arrest phenotype virtually identical to that seen for rad27 cells grown at the restrictive temperature. Furthermore, overexpression of the yeast exonuclease Exo1p alleviated the growth arrest induced by both conditions, overexpression of Dna2p and incubation of rad27 cells at 37 degrees C. However, the telomere heterogeneity and the appearance of single-stranded DNA are not prevented by the overexpression of Exo1p in these strains, suggesting that this nuclease is not simply redundant with Rad27p. Our data thus provide in vivo evidence for the types of DNA lesions predicted to occur when lagging-strand synthesis is deficient and suggest that Dna2p and Rad27p collaborate in the processing of Okazaki fragments.