Homology-directed repair is a powerful mechanism for maintaining and altering genomic structure. We asked how chromatin structure contributes to the use of homologous sequences as donors for repair using the chicken B cell line DT40 as a model. In DT40, immunoglobulin genes undergo regulated sequence diversification by gene conversion templated by pseudogene donors. We found that the immunoglobulin Vlambda pseudogene array is characterized by histone modifications associated with active chromatin. We directly demonstrated the importance of chromatin structure for gene conversion, using a regulatable experimental system in which the heterochromatin protein HP1 (Drosophila melanogaster Su[var]205), expressed as a fusion to Escherichia coli lactose repressor, is tethered to polymerized lactose operators integrated within the pseudo-Vlambda donor array. Tethered HP1 diminished histone acetylation within the pseudo-Vlambda array, and altered the outcome of Vlambda diversification, so that nontemplated mutations rather than templated mutations predominated. Thus, chromatin structure regulates homology-directed repair. These results suggest that histone modifications may contribute to maintaining genomic stability by preventing recombination between repetitive sequences.