XRCC3 is a RAD51 paralog that functions in the repair of DNA double-strand breaks (DSBs) by homologous recombination (HR). XRCC3 mutation causes severe chromosome instability. We find that XRCC3 mutant cells display radically altered HR product spectra, with increased gene conversion tract lengths, increased frequencies of discontinuous tracts, and frequent local rearrangements associated with HR. These results indicate that XRCC3 function is not limited to HR initiation, but extends to later stages in formation and resolution of HR intermediates, possibly by stabilizing heteroduplex DNA. The results further demonstrate that HR defects can promote genomic instability not only through failure to initiate HR (leading to nonhomologous repair) but also through aberrant processing of HR intermediates. Both mechanisms may contribute to carcinogenesis in HR-deficient cells.