The evolutionarily conserved heterotrimeric Mre11/Rad50/Xrs2 (Nbs1) (MRX/N) complex plays a central role in an array of cellular responses involving DNA damage, telomere length homeostasis, cell-cycle checkpoint control and meiotic recombination. The underlying biochemical functions of MRX/N complex, or each of its individual subunits, at telomeres and the importance of complex formation are poorly understood. Here, we show that the Saccharomyces cerevisiae MRX complex, or its subunits, display an overwhelming preference for G-quadruplex DNA than for telomeric single-stranded or double-stranded DNA implicating the possible existence of this DNA structure in vivo. Although these alternative DNA substrates failed to affect Rad50 ATPase activity, kinetic analyses revealed that interaction of Rad50 with Xrs2 and/or Mre11 led to a twofold increase in the rates of ATP hydrolysis. Significantly, we show that Mre11 displays sequence-specific double-stranded DNA endonuclease activity, and Rad50, but not Xrs2, abrogated endonucleolytic but not the exonucleolytic activity. This repression was alleviated upon ATP hydrolysis by Rad50, suggesting that complex formation between Rad50 and Mre11 might be important for blocking the inappropriate cleavage of genomic DNA. Mre11 alone, or in the presence of ATP, MRX, MR or MX sub-complexes cleaved at the 5' end of an array of G residues in single-stranded DNA, at G quartets in G4 DNA, and at the center of TGTG repeats in duplex DNA. We propose that negative regulation of Mre11 endonuclease activity by Rad50 might be important for native as well as de novo telomere length homeostasis.