In Drosophila, P-element transposition causes mutagenesis and genome instability during hybrid dysgenesis. The P-element 31-bp terminal inverted repeats (TIRs) contain sequences essential for transposase cleavage and have been implicated in DNA repair via protein-DNA interactions with cellular proteins. The identity and function of these cellular proteins were unknown. Biochemical characterization of proteins that bind the TIRs identified a heterodimeric basic leucine zipper (bZIP) complex between an uncharacterized protein that we termed "Inverted Repeat Binding Protein (IRBP) 18" and its partner Xrp1. The reconstituted IRBP18/Xrp1 heterodimer binds sequence-specifically to its dsDNA-binding site within the P-element TIRs. Genetic analyses implicate both proteins as critical for repair of DNA breaks following transposase cleavage in vivo. These results identify a cellular protein complex that binds an active mobile element and plays a more general role in maintaining genome stability.