We have developed a system for analyzing recombination between a DNA fragment released in the nucleus from a single-copy plasmid and a genomic target in order to determine the influence of DNA sequence mismatches on the frequency of gene replacement in Saccharomyces cerevisiae. Mismatching was shown to be a potent barrier to efficient gene replacement, but its effect was considerably ameliorated by the presence of DNA sequences that are identical to the genomic target at one end of a chimeric DNA fragment. Disruption of the mismatch repair gene MSH2 greatly reduces but does not eliminate the barrier to recombination between mismatched DNA fragment and genomic target sequences, indicating that the inhibition of gene replacement with mismatched sequences is at least partially under the control of mismatch repair. We also found that mismatched sequences inhibited recombination between a DNA fragment and the genome only when they were close to the edge of the fragment. Together these data indicate that while mismatches can destabilize the relationship between a DNA fragment and a genomic target sequence, they will only do so if they are likely to be in the heteroduplex formed between the recombining molecules.