Loss of heterozygosity (LOH), a causal event in cancer and human genetic diseases, frequently encompasses multiple genetic loci and whole chromosome arms. However, the mechanisms by which such extensive LOH arises, and how it is suppressed in normal cells is poorly understood. We have developed a genetic system to investigate the mechanisms of DNA double-strand break (DSB)-induced extensive LOH, and its suppression, using a non-essential minichromosome, Ch(16), in fission yeast. We find extensive LOH to arise from a new break-induced mechanism of isochromosome formation. Our data support a model in which Rqh1 and Exo1-dependent end processing from an unrepaired DSB leads to removal of the broken chromosome arm and to break-induced replication of the intact arm from the centromere, a considerable distance from the initial lesion. This process also promotes genome-wide copy number variation. A genetic screen revealed Rhp51, Rhp55, Rhp57 and the MRN complex to suppress both isochromosome formation and chromosome loss, in accordance with these events resulting from extensive end processing associated with failed homologous recombination repair.