The DNA of human parvovirus adeno-associated virus type 2 (AAV) integrates preferentially into a defined region of human chromosome 19. Southern blots of genomic DNA from latently infected cell lines revealed that the provirus was not simply inserted into the cellular DNA. Both the proviral and adjoining cellular DNA organization indicated that integration occurred by a complex, coordinated process involving limited DNA replication and rearrangements. However, the mechanism for targeted integration has remained obscure. The two larger nonstructural proteins (Rep68 and Rep78) of AAV bind to a sequence element that is present in both the integration locus (P1) and the AAV inverted terminal repeat. This binding may be important for targeted integration. To investigate the mechanism of targeted integration, we tested the cloned integration site subfragment in a cell-free replication assay in the presence or absence of recombinant Rep proteins. Extensive, asymmetric replication of linear or open-circular template DNA was dependent on the presence of P1 sequence and Rep protein. The activities of Rep on the cloned PI element are analogous to activities on the AAV inverted terminal repeat. Replication apparently initiates from a 3'-OH generated by the sequence- specific nicking activity of Rep. This results in a covalent attachment between Rep and the 5'-thymidine of the nick. The complexity of proviral structures can be explained by the participation of limited DNA replication facilitated by Rep during integration.