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Foldback priming at DNA double-stranded breaks is one mechanism proposed to initiate palindromic gene amplification, a common feature of cancer cells. Here, we show that small (5-9 bp) inverted repeats drive the formation of large palindromic duplications, the major class of chromosomal rearrangements recovered from yeast cells lacking Sae2 or the Mre11 nuclease. RPA dysfunction increased the frequency of palindromic duplications in Sae2 or Mre11 nuclease-deficient cells by ∼ 1,000-fold, consistent with intra-strand annealing to create a hairpin-capped chromosome that is subsequently replicated to form a dicentric isochromosome. The palindromic duplications were frequently associated with duplication of a second chromosome region bounded by a repeated sequence and a telomere, suggesting the dicentric chromosome breaks and repairs by recombination between dispersed repeats to acquire a telomere. We propose secondary structures within single-stranded DNA are potent instigators of genome instability, and RPA and Mre11-Sae2 play important roles in preventing their formation and propagation, respectively.