Several prokaryotic Argonaute proteins (pAgos) utilize small DNA guides to mediate host defense by targeting invading DNA complementary to the DNA guide. It is unknown how these DNA guides are being generated and loaded onto pAgo. Here, we demonstrate that guide-free Argonaute from Thermus thermophilus (TtAgo) can degrade double-stranded DNA (dsDNA), thereby generating small dsDNA fragments that subsequently are loaded onto TtAgo. Combining single-molecule fluorescence, molecular dynamic simulations, and structural studies, we show that TtAgo loads dsDNA molecules with a preference toward a deoxyguanosine on the passenger strand at the position opposite to the 5' end of the guide strand. This explains why in vivo TtAgo is preferentially loaded with guides with a 5' end deoxycytidine. Our data demonstrate that TtAgo can independently generate and selectively load functional DNA guides.