Interstitial telomeric sequences (ITSs) are present in many eukaryotic genomes and are linked to genome instabilities and disease in humans. The mechanisms responsible for ITS-mediated genome instability are not understood in molecular detail. Here, we use a model Saccharomyces cerevisiae system to characterize genome instability mediated by yeast telomeric (Ytel) repeats embedded within an intron of a reporter gene inside a yeast chromosome. We observed a very high rate of small insertions and deletions within the repeats. We also found frequent gross chromosome rearrangements, including deletions, duplications, inversions, translocations, and formation of acentric minichromosomes. The inversions are a unique class of chromosome rearrangement involving an interaction between the ITS and the true telomere of the chromosome. Because we previously found that Ytel repeats cause strong replication fork stalling, we suggest that formation of double-stranded DNA breaks within the Ytel sequences might be responsible for these gross chromosome rearrangements.