Double strand DNA breaks (DSBs) are dangerous events that can result from various causes including environmental assaults or the collapse of DNA replication. While the efficient and precise repair of DSBs is essential for cell survival, faulty repair can lead to genetic instability, making the choice of DSB repair an important step. Here we report that inverted DNA repeats (IRs) placed near a DSB can channel its repair from an accurate pathway that leads to gene conversion to instead a break-induced replication (BIR) pathway that leads to genetic instabilities. The effect of IRs is explained by their ability to form unusual DNA structures when present in ssDNA that is formed by DSB resection. We demonstrate that IRs can form two types of unusual DNA structures, and the choice between these structures depends on the length of the spacer separating IRs. In particular, IRs separated by a long (1-kb) spacer are predominantly involved in inter-molecular single-strand annealing (SSA) leading to the formation of inverted dimers; IRs separated by a short (12-bp) spacer participate in intra-molecular SSA, leading to the formation of fold-back (FB) structures. Both of these structures interfere with an accurate DSB repair by gene conversion and channel DSB repair into BIR, which promotes genomic destabilization. We also report that different protein complexes participate in the processing of FBs containing short (12-bp) versus long (1-kb) ssDNA loops. Specifically, FBs with short loops are processed by the MRX-Sae2 complex, whereas the Rad1-Rad10 complex is responsible for the processing of long loops. Overall, our studies uncover the mechanisms of genomic destabilization resulting from re-routing DSB repair into unusual pathways by IRs. Given the high abundance of IRs in the human genome, our findings may contribute to the understanding of IR-mediated genomic destabilization associated with human disease.