Polymerase theta (Polθ) acts in DNA replication and repair, and its inhibition is synthetic lethal in BRCA1 and BRCA2-deficient tumor cells. Novobiocin (NVB) is a first-in-class inhibitor of the Polθ ATPase activity, and it is currently being tested in clinical trials as an anti-cancer drug. Here, we investigated the molecular mechanism of NVB-mediated Polθ inhibition. Using hydrogen deuterium exchange-mass spectrometry (HX-MS), biophysical, biochemical, computational and cellular assays, we found NVB is a non-competitive inhibitor of ATP hydrolysis. NVB sugar group deletion resulted in decreased potency and reduced HX-MS interactions, supporting a specific NVB binding orientation. Collective results revealed that NVB binds to an allosteric site to block DNA binding, both in vitro and in cells. Comparisons of The Cancer Genome Atlas (TCGA) tumors and matched controls implied that POLQ upregulation in tumors stems from its role in replication stress responses to increased cell proliferation: this can now be tested in fifteen tumor types by NVB blocking ssDNA-stimulation of ATPase activity, required for Polθ function at replication forks and DNA damage sites. Structural and functional insights provided in this study suggest a path for developing NVB derivatives with improved potency for Polθ inhibition by targeting ssDNA binding with entropically constrained small molecules.