Many amplified genes, including some oncogenes, are organized as large inverted repeats. How such giant palindromes are generated remains largely unknown. Recent studies of a palindrome in the ciliate Tetrahymena suggest a novel mechanism that requires chromosome breakage next to short inverted repeats. The prevalence of short inverted repeats in eukaryotic genomes raises the interesting possibility that this process may occur widely as a response to chromosome damage. Here we demonstrate that in Saccharomyces cerevisiae, large DNA palindromes are formed efficiently, probably by intramolecular recombination, when a double-strand break is introduced next to short inverted repeats. These results suggest a general mechanism for large palindromic DNA formation and reveal an important new source of genome instability resulting from chromosome breakage at selective sites.