A Tn3 derivative was constructed to make small in-frame insertions within genes. The transposon contains the URA3 gene, the tetA gene, a truncated lacZ, and phage P1 loxP recombination sites at either end. Insertions that have fused lacZ to an open reading frame are lac+ because they express the truncated lacZ. In the presence of the phage P1 cyclization recombinase cre, the transposon can delete the URA3, tetA, and lacZ genes between the two loxP sites. The remaining short imperfect palindrome contains the ends of Tn3 and a loxP site and does not contain a translational termination codon in the correct reading frame. We have analyzed several insertions within the yeast HO gene. Several insertions inactivate HO and prohibit initiation of mating-type switching. In contrast, an epitope inserted in the central portion encodes a functional HO endonuclease.