DNA ends exposed after introduction of double-strand breaks (DSBs) undergo 5'-3' nucleolytic degradation to generate single-stranded DNA, the substrate for binding by the Rad51 protein to initiate homologous recombination. This process is poorly understood in eukaryotes, but several factors have been implicated, including the Mre11 complex (Mre11-Rad50-Xrs2/NBS1), Sae2/CtIP/Ctp1 and Exo1. Here we demonstrate that yeast Exo1 nuclease and Sgs1 helicase function in alternative pathways for DSB processing. Novel, partially resected intermediates accumulate in a double mutant lacking Exo1 and Sgs1, which are poor substrates for homologous recombination. The early processing step that generates partly resected intermediates is dependent on Sae2. When Sae2 is absent, in addition to Exo1 and Sgs1, unprocessed DSBs accumulate and homology-dependent repair fails. These results suggest a two-step mechanism for DSB processing during homologous recombination. First, the Mre11 complex and Sae2 remove a small oligonucleotide(s) from the DNA ends to form an early intermediate. Second, Exo1 and/or Sgs1 rapidly process this intermediate to generate extensive tracts of single-stranded DNA that serve as substrate for Rad51.