A novel two-step gene replacement protocol was developed to construct a recombinant industrial yeast free of bacterial and drug-resistant marker sequences. A yeast strain exhibiting cerulenin resistance conferred by a dominant mutation of FAS2 was previously shown to produce high levels of a flavor component of Japanese sake. A N- and C-terminally truncated portion of the mutant FAS2 gene was subcloned to an integrating plasmid containing an aureobasidin A-resistant transformation marker and a galactose-inducible growth inhibitory sequence (GAL10p::GIN11). The plasmid was targeted into the chromosomal FAS2 locus of sake yeast Kyokai no. 7, resulting in a tandem repeat of inactive FAS2 sequences surrounding the integrated plasmid sequences. Cells containing the integrated plasmid were unable to grow on galactose medium due to the inhibitory effect of GAL10p::GIN11. This growth inhibition allowed efficient counter-selection for cells that had undergone homologous recombination between the FAS2 repeats by their growth on galactose medium. This recombination event resulted in loss of the integrated plasmid sequences and the resulting strains should contain a single copy of either wild-type or cerulenin-resistant FAS2. The selected cerulenin-resistant strains produced approximately 3.7-fold more ethyl caproate, a flavor component, than the Kyokai no. 7 strain. Southern blot and sequence analyses confirmed the presence of the FAS2 mutation and the absence of integrated plasmid sequences in the genome of the selected strain. This gene replacement method provides a straightforward approach for the construction of recombinant industrial yeasts free of undesirable DNA sequences.