The adeno-associated virus (AAV) nonstructural protein Rep 68 is required for viral DNA replication. An in vitro assay has been developed in which addition of Rep 68 to an extract from uninfected HeLa cells supports AAV DNA replication. In this paper, we report characterization of the replication process when a fusion of the maltose binding protein and Rep 68, expressed in Escherichia coli, was used in the assay. Replication was observed when the template was either linear double-stranded AAV DNA or a plasmid construct containing intact AAV DNA. When the recombinant plasmid construct was used as the template, there was replication of pBR322 DNA as well as the AAV DNA; however, linear pBR322 DNA was not replicated. When the plasmid construct was the template, replication appeared to initiate on the intact plasmid and led to separation of the AAV sequences from those of the vector, a process which has been termed rescue. There was no evidence that replication could initiate on the products of rescue. Rep 68 can make a site-specific nick 124 nucleotides from the 3' end of AAV DNA; the site of the nick has been called the terminal resolution site. Our data are most consistent with initiation occurring at the terminal resolution site and proceeding toward the 3' terminus. When the template was the plasmid construct, either elongation continued past the junction into pBR322 sequences or the newly synthesized sequence hairpinned, switched template strands, and replicated the AAV DNA. Replication was linear for 4 h, during which time 70% of the maximal synthesis took place. An additional finding was that the Rep fusion could resolve AAV dimer length duplex intermediates into monomer duplexes without DNA synthesis.