Recent high-resolution genome analyses of cancer and other diseases have revealed the occurrence of microhomology-mediated chromosome rearrangements and copy number changes. Although some of these rearrangements appear to involve nonhomologous end-joining, many must have involved mechanisms requiring new DNA synthesis. Models such as microhomology-mediated break-induced replication (MM-BIR) have been invoked to explain these rearrangements. We examined BIR and template switching between highly diverged sequences in Saccharomyces cerevisiae, induced during repair of a site-specific double-strand break (DSB). Our data show that such template switches are robust mechanisms that give rise to complex rearrangements. Template switches between highly divergent sequences appear to be mechanistically distinct from the initial strand invasions that establish BIR. In particular, such jumps are less constrained by sequence divergence and exhibit a different pattern of microhomology junctions. BIR traversing repeated DNA sequences frequently results in complex translocations analogous to those seen in mammalian cells. These results suggest that template switching among repeated genes is a potent driver of genome instability and evolution.