The Ntg1 and Mhr1 proteins initiate rolling-circle mitochondrial (mt) DNA replication to achieve homoplasmy, and they also induce homologous recombination to maintain mitochondrial genome integrity. Although replication and recombination profoundly influence mitochondrial inheritance, the regulatory mechanisms that determine the choice between these pathways remain unknown. In Saccharomyces cerevisiae, double-strand breaks (DSBs) introduced by Ntg1 at the mitochondrial replication origin ori5 induce homologous DNA pairing by Mhr1, and reactive oxygen species (ROS) enhance production of DSBs. Here, we show that a mitochondrial nuclease encoded by the nuclear gene DIN7 (DNA damage inducible gene) has 5'-exodeoxyribonuclease activity. Using a small ρ(-) mtDNA bearing ori5 (hypersuppressive; HS) as a model mtDNA, we revealed that DIN7 is required for ROS-enhanced mtDNA replication and recombination that are both induced at ori5. Din7 overproduction enhanced Mhr1-dependent mtDNA replication and increased the number of residual DSBs at ori5 in HS-ρ(-) cells and increased deletion mutagenesis at the ori5 region in ρ(+) cells. However, simultaneous overproduction of Mhr1 suppressed all of these phenotypes and enhanced homologous recombination. Our results suggest that after homologous pairing, the relative activity levels of Din7 and Mhr1 modulate the preference for replication versus homologous recombination to repair DSBs at ori5.