In many organisms, telomeric sequences can be located internally on the chromosome in addition to their usual positions at the ends of the chromosome. In humans, such interstitial telomeric sequences (ITSs) are nonrandomly associated with translocation breakpoints in tumor cells and with chromosome fragile sites (regions of the chromosome that break in response to perturbed DNA replication). We previously showed that ITSs in yeast generated several different types of instability, including terminal inversions (recombination between the ITS and the "true" chromosome telomere) and point mutations in DNA sequences adjacent to the ITS. In the current study, we examine the genetic control of these events. We show that the terminal inversions occur by the single-strand annealing pathway of DNA repair following the formation of a double-stranded DNA break within the ITS. The point mutations induced by the ITS require the error-prone DNA polymerase ζ. Unlike the terminal inversions, these events are not initiated by a double-stranded DNA break, but likely result from the error-prone repair of a single-stranded DNA gap or recruitment of DNA polymerase ζ in the absence of DNA damage.