Previous studies showed that the K342E substitution in the Saccharomyces cerevisiae Rad51 protein increases the interaction with Rad54 protein in the two-hybrid system, leads to increased sensitivity to the alkylating agent MMS and hyper-recombination in an oligonucleotide-mediated gene targeting assay. K342 localizes in loop 2, a region of Rad51 whose function is not well understood. Here, we show that Rad51-K342E displays DNA-independent and DNA-dependent ATPase activities, owing to its ability to form filaments in the absence of a DNA lattice. These filaments exhibit a compressed pitch of 81 A, whereas filaments of wild-type Rad51 and Rad51-K342E on DNA form extended filaments with a 97 A pitch. Rad51-K342E shows near normal binding to ssDNA, but displays a defect in dsDNA binding, resulting in less stable protein-dsDNA complexes. The mutant protein is capable of catalyzing the DNA strand exchange reaction and is insensitive to inhibition by the early addition of dsDNA. Wild-type Rad51 protein is inhibited under such conditions, because of its ability to bind dsDNA. No significant changes in the interaction between Rad51-K342E and Rad54 could be identified. These findings suggest that loop 2 contributes to the primary DNA-binding site in Rad51, controlling filament formation and ATPase activity.