DNA polymerase lambda contains template-dependent (DNA polymerase) and template-independent (terminal transferase) activities. In this study we enzymologically characterized the terminal transferase activity of polymerase lambda (pol lambda-tdt). Pol lambda-tdt activity was strongly influenced by the nature of the 3'-terminal sequence of the DNA substrate, and it required a single-stranded (ss) DNA 3'-overhang of about 9-12 nucleotides for optimal activity. The strong preference observed for pyrimidine versus purine nucleotide incorporation was found to be due, at least partially, to a steric block imposed by the residue Tyr-505 in the active site of pol lambda. Pol lambda-tdt was found to be able to elongate a 3'-ssDNA end by two alternative mechanisms: first, a template-independent one resulting in addition of 1 or 2 nucleotides, and second, a template-dependent one where a homopolymeric tract as short as 3 nucleotides at the 3'-end could be used as a template to direct DNA polymerization by a looping back mechanism. Furthermore repetitive cycles of DNA synthesis resulted in the expansion of such a short homopolymeric terminal sequence. Most importantly we found that the proliferating cell nuclear antigen was able to selectively block the looping back mechanism while stimulating the single terminal nucleotide addition. Finally replication protein A completely suppressed the transferase activity of pol lambda while stimulating the polymerase activity, suggesting that proliferating cell nuclear antigen and replication protein A can coordinate the polymerase and the terminal transferase activities of pol lambda.