Homology-directed repair of DNA damage has recently emerged as a major mechanism for the maintenance of genomic integrity in mammalian cells. The highly conserved strand transferase, Rad51, is expected to be critical for this process. XRCC3 possesses a limited sequence similarity to Rad51 and interacts with it. Using a novel fluorescence-based assay, we demonstrate here that error-free homology-directed repair of DNA double-strand breaks is decreased 25-fold in an XRCC3-deficient hamster cell line and can be restored to wild-type levels through XRCC3 expression. These results establish that XRCC3-mediated homologous recombination can reverse DNA damage that would otherwise be mutagenic or lethal.