DNA polymerase theta (Pol θ) initiates repair of DNA double-strand breaks by pairing single strands at short "microhomologies". It is important to understand microhomology selection, as some cancer cells rely on Pol θ for survival. Here, we investigate end-joining by purified human Pol θ, employing DNA sequencing of products generated from oligonucleotide libraries having diverse 3' ends. Pol θ overwhelmingly selects short internal microhomologies found within 15 nucleotides of the terminus of single-stranded DNAs, restricting deletion size during end-joining. Significantly, we find that the selected microhomologies are usually interrupted by mismatches and that base pairing within 6 nucleotides of the 3' end is important for determining microhomology choice. Bidirectional synthesis is not necessary to initiate end-joining. The preference for mismatched microhomologies suggests a revision of the definition of microhomology to account for the unique properties of Pol θ. This could advance the analysis of mutations in cancer genomes.