While inverted DNA repeats are generally acknowledged to be an important source of genetic instability in prokaryotes, relatively little is known about their effects in eukaryotes. Using bacterial transposon Tn5 and its derivatives, we demonstrate that long inverted repeats also cause genetic instability leading to deletion in the yeast Saccharomyces cerevisiae. Furthermore, they induce homologous recombination. Replication plays a major role in the deletion formation. Deletions are stimulated by a mutation in the DNA polymerase delta gene (pol3). The majority of deletions result from imprecise excision between small (4- to 6-bp) repeats in a polar fashion, and they often generate quasipalindrome structures that subsequently may be highly unstable. Breakpoints are clustered near the ends of the long inverted repeats (< 150 bp). The repeats have both intra- and interchromosomal effects in that they also create hot spots for mitotic interchromosomal recombination. Intragenic recombination is 4 to 18 times more frequent for heteroalleles in which one of the two mutations is due to the insertion of a long inverted repeat, compared with other pairs of heteroalleles in which neither mutation has a long repeat. We propose that both deletion and recombination are the result of altered replication at the basal part of the stem formed by the inverted repeats.