The topoisomerase (topo) III enzymes are found in organisms ranging from bacteria to humans, yet the precise cellular function of these enzymes remains to be determined. We previously found that Drosophila topo IIIbeta can relax plasmid DNA only if the DNA is first hypernegatively supercoiled. To investigate the possibility that topo IIIbeta requires a single-stranded region for its relaxation activity, we formed R-loops and D-loops in plasmids. In addition to containing a single-stranded region, these R-loops and D-loops have the advantage of being covalently closed and supercoiled, thus allowing us to assay for supercoil relaxation. We found that topo IIIbeta preferentially cleaves, rather than relaxes, these substrates. The cleavage of the R-loops and D-loops, which is primarily in the form of nicking, occurs to a greater extent at a temperature that is lower than the optimal temperature for relaxation of hypernegatively supercoiled plasmid. In addition, the cleavage can be readily reversed by high salt or high temperature, and the products fail to enter the gel in the absence of proteinase K treatment and are not observed with an active-site Y332F mutant of topo IIIbeta, indicating that the cleavage is mediated by a topoisomerase. We mapped the cleavage to the unpaired strand within the loop region and found that the cleavage occurs along the length of the unpaired strand. These studies suggest that the topo III enzyme behaves as a structure-specific endonuclease in vivo, providing a reversible DNA cleavage activity that is specific for unpaired regions in the DNA.