Until recently, the only biological function attributed to the 3′→5′ exonuclease activity of DNA polymerases was proofreading of replication errors. Based on genetic and biochemical analysis of the 3′→5′ exonuclease of yeast DNA polymerase δ (Pol δ) we have discerned additional biological roles for this exonuclease in Okazaki fragment maturation and mismatch repair. We asked whether Pol δ exonuclease performs all these biological functions in association with the replicative complex or as an exonuclease separate from the replicating holoenzyme. We have identified yeast Pol δ mutants at Leu523 that are defective in processive DNA synthesis when the rate of misincorporation is high because of a deoxynucleoside triphosphate (dNTP) imbalance. Yet the mutants retain robust 3′→5′ exonuclease activity. Based on biochemical studies, the mutant enzymes appear to be impaired in switching of the nascent 3′ end between the polymerase and the exonuclease sites, resulting in severely impaired biological functions. Mutation rates and spectra and synergistic interactions of the pol3-L523X mutations with msh2, exo1, and rad27/fen1 defects were indistinguishable from those observed with previously studied exonuclease-defective mutants of the Pol δ. We conclude that the three biological functions of the 3′→5′ exonuclease addressed in this study are performed intramolecularly within the replicating holoenzyme.