Abstract Inverted duplications, also known as foldback inversions, are commonly observed in cancers and are the major class of chromosome rearrangement recovered from yeast cells lacking Mre11 nuclease activity. Foldback priming at DNA double-strand breaks (DSBs) is one mechanism proposed for the generation of inverted duplications. However, the other pathway steps have not been fully elucidated. Here, we show that a DSB induced near natural inverted repeats drives high frequency inverted duplication in Sae2 and Mre11-deficient cells. We find that DNA polymerase δ proof-reading activity, but not Rad1 nuclease, trims the heterologous flaps formed after foldback annealing. Additionally, Pol32 is required for the generation of inverted duplications, suggesting that Pol δ catalyzes fill-in synthesis primed from the foldback to create a hairpin-capped chromosome that is subsequently replicated to form a dicentric inversion chromosome. Finally, we show that stabilization of the dicentric chromosome after breakage involves telomere capture by non-reciprocal translocation mediated by repeat sequences or by deletion of one centromere.