The in vitro fidelity of Escherichia coli DNA polymerase III holoenzyme (HE) is characterized by an unusual propensity for generating (-1)-frameshift mutations. Here we have examined the capability of HE isolated from both a wild-type and a proofreading-impaired mutD5 strain to polymerize from M13mp2 DNA primer-templates containing a terminal T(template).C mismatch. These substrates contained either an A or a G as the next (5') template base. The assay allows distinction between: (i) direct extension of the terminal C (producing a base substitution), (ii) exonucleolytic removal of the C, or (iii), for the G-containing template, extension after misalignment of the C on the next template G (producing a (-1)-frameshift). On the A-containing substrate, both HEs did not extend the terminal C (<1%); instead, they exonucleolytically removed it (>99%). In contrast, on the G-containing substrate, the MutD5 HE yielded 61% (-1)-frameshifts and 6% base substitutions. The wild-type HE mostly excised the mispaired C from this substrate before extension (98%), but among the 2% mutants, (-1)-frameshifts exceeded base substitutions by 20 to 1. The preference of polymerase III HE for misalignment extension over direct mismatch extension provides a basis for explaining the in vitro (-1)-frameshift specificity of polymerase III HE.