RecQ5 in mammalian cells has been suggested to suppress inappropriate homologous recombination. However, the specific pathway(s) in which it is involved and the underlining mechanism(s) remain poorly understood. We took advantage of genetic tools in Drosophila to investigate how Drosophila RecQ5 (dRecQ5) functions in vivo in homologous recombination-mediated double strand break (DSB) repair. We generated null alleles of dRecQ5 using the targeted recombination technique. The mutant animals are homozygous viable, but with growth retardation during development. The mutants are sensitive to both exogenous DSB-inducing treatment, such as gamma-irradiation, and endogenously induced double strand breaks (DSBs) by I-Sce I endonuclease. In the absence of dRecQ5, single strand annealing (SSA)-mediated DSB repair is compromised with compensatory increases in either inter-homologous gene conversion, or non-homologous end joining (NHEJ) when inter-chromosomal homologous sequence is unavailable. Loss of function of dRecQ5 also leads to genome instability in loss of heterozygosity (LOH) assays. Together, our data demonstrate that dRecQ5 functions in SSA-mediated DSB repair to achieve its full efficiency and in suppression of LOH in Drosophila.