The 3' end of mammalian histone mRNAs consisting of a conserved stem-loop and a terminal ACCCA interacts with a recently identified human 3' exonuclease designated 3'hExo. The sequence-specific interaction suggests that 3'hExo may participate in the degradation of histone mRNAs. ERI-1, a Caenorhabditis elegans homologue of 3'hExo, has been implicated in degradation of small interfering RNAs. We introduced a number of mutations to 3'hExo to identify residues required for RNA binding and catalysis. To assure that the introduced mutations specifically target one of these two activities of 3'hExo rather than cause global structural defects, the mutant proteins were tested in parallel for the ability both to bind the stem-loop RNA and to degrade RNA substrates. Our analysis confirms that 3'hExo is a member of the DEDDh family of 3' exonucleases. Specific binding to the RNA requires the SAP domain and two lysines located immediately to its C terminus. 3'hExo binds with the highest affinity to the wild-type 3' end of histone mRNA, and any changes to this sequence reduce efficiency of binding. 3'hExo has only residual, if any, 3' exonuclease activity on DNA substrates and localizes mostly to the cytoplasm, suggesting that in vivo it performs exclusively RNA-specific functions. Efficient degradation of RNA substrates by 3'hExo requires 2' and 3' hydroxyl groups at the last nucleotide. 3'hExo removes 3' overhangs of small interfering RNAs, whereas the double-stranded region is resistant to the enzymatic activity.