The replicative polymerase of bacteriophage T7 is structurally and mechanistically well characterized. The crystal structure of T7 DNA polymerase or gene 5 protein complexed to its processivity factor, Escherichia coli thioredoxin, a primer-template, and a dideoxynucleotide reveals how this enzyme interacts with the 3'-end of the primer-template, but does not show how thioredoxin confers processivity to the polymerase. In the crystal structure highly conserved amino acids Asn(335) and Ser(338) of the thumb subdomain of T7 DNA polymerase are seen to interact with phosphates 7 and 8 of the DNA template strand. Results with a mutant T7 DNA polymerase in which aliphatic residues are substituted for these amino acids and experiments with different length and methylphosphonate-modified primer-templates demonstrate that these interactions are essential for processive synthesis and d(A.T)(n) tract bypass. Our data with methylphosphonate-modified DNA suggests that thioredoxin confers processivity to T7 DNA polymerase in part by causing an interaction with the phosphate backbone or minor groove of DNA. Residues Asn(335) and Ser(338) may also function with a nearby helix-loop-helix motif located at residues 339-372 to enclose the DNA during processive synthesis. Our results suggest that this structure must be held close to the DNA by ionic interactions to function. These interactions also allow for DNA sliding but physically block the passage of a 3T bulge in the template. In contrast, yeast polymerase eta, a polymerase that non-mutagenically repairs cis-syn thymidine dimers, allows the same bulge to slide past its thumb subdomain during synthesis. A relaxed thumb interaction with the DNA could account for the notably low processivity of polymerase eta.