In an in vitro simian virus 40 (SV40) DNA replication assay, we have observed excision of a hybrid adeno-associated virus (AAV)/SV40 insert from a plasmid construct. The excision was dependent on the presence of the palindromic AAV terminal repeat and greatly enhanced by the addition of the SV40 T antigen to the reaction. Analysis of the excision product supports a model in which the palindromic terminal sequences of AAV form a cruciform structure (equivalent to a Holliday recombination intermediate), which is cleaved and resealed so that the excision products are linear duplex pBR322 and linear duplex AAV/SV40 insert. Both the excised linear duplex pBR322 and the excised linear duplex AAV/SV40 insert have each terminus covalently crosslinked by one copy of the palindromic region of the AAV terminal repeat region folded on itself. The excision process may be a model system for cellular homologous recombination. The process as observed was either concomitant with or subsequent to DNA replication.