For toxin/antitoxin (TA) systems, no toxin has been identified that functions by cleaving DNA. Here, we demonstrate that RalR and RalA of the cryptic prophage rac form a type I TA pair in which the antitoxin RNA is a trans-encoded small RNA with 16 nucleotides of complementarity to the toxin mRNA. We suggest the newly discovered antitoxin gene be named ralA for RalR antitoxin. Toxin RalR functions as a non-specific endonuclease that cleaves methylated and unmethylated DNA. The RNA chaperone Hfq is required for RalA antitoxin activity and appears to stabilize RalA. Also, RalR/RalA is beneficial to the Escherichia coli host for responding to the antibiotic fosfomycin. Hence, our results indicate that cryptic prophage genes can be functionally divergent from their active phage counterparts after integration into the host genome.