Homologous recombination (HR) enables precise DNA repair after DNA double strand breaks (DSBs) using identical sequence templates, whereas homeologous recombination (HeR) uses only partially homologous sequences. Homeologous recombination introduces mutations through gene conversion and genomic deletions through single-strand annealing (SSA). DNA mismatch repair (MMR) inhibits HeR, but the roles of mammalian MMR MutL homologues (MLH1, PMS2 and MLH3) proteins in HeR suppression are poorly characterized. Here, we demonstrate that mouse embryonic fibroblasts (MEFs) carrying Mlh1, Pms2, and Mlh3 mutations have higher HeR rates, by using 7,863 uniquely mapping paired direct repeat sequences (DRs) in the mouse genome as endogenous gene conversion and SSA reporters. Additionally, when DSBs are induced by gamma-radiation, Mlh1, Pms2 and Mlh3 mutant MEFs have higher DR copy number alterations (CNAs), including DR CNA hotspots previously identified in mouse MMR-deficient colorectal cancer (dMMR CRC). Analysis of The Cancer Genome Atlas CRC data revealed that dMMR CRCs have higher genome-wide DR HeR rates than MMR proficient CRCs, and that dMMR CRCs have deletion hotspots in tumor suppressors FHIT/WWOX at chromosomal fragile sites FRA3B and FRA16D (which have elevated DSB rates) flanked by paired homologous DRs and inverted repeats (IR). Overall, these data provide novel insights into the MMR-dependent HeR inhibition mechanism and its role in tumor suppression.