IS256 is the founding member of the IS256 family of insertion sequence (IS) elements. These elements encode a poorly characterized transposase, which features a conserved DDE catalytic motif and produces circular IS intermediates. Here, we characterized the IS256 transposase as a DNA-binding protein and obtained insight into the subdomain organization and functional properties of this prototype enzyme of IS256 family transposases. Recombinant forms of the transposase were shown to bind specifically to inverted repeats present in the IS256 noncoding regions. A DNA-binding domain was identified in the N-terminal part of the transposase, and a mutagenesis study targeting conserved amino acid residues in this region revealed a putative helix-turn-helix structure as a key element involved in DNA binding. Furthermore, we obtained evidence to suggest that the terminal nucleotides of IS256 are critically involved in IS circularization. Although small deletions at both ends reduced the formation of IS circles, changes at the left-hand IS256 terminus proved to be significantly more detrimental to circle production. Taken together, the data lead us to suggest that the IS256 transposase-mediated circularization reaction preferentially starts with a sequence-specific first-strand cleavage at the left-hand IS terminus.