Observations that genome-wide DNA hypomethylation induces genome instability and tumors in animals caution against the indiscriminate use of demethylating agents, such as 5-aza-2'-deoxycytidine (5-Aza-dC). Using primary mouse embryonic fibroblasts harboring a lacZ mutational reporter construct that allows the quantification and characterization of a wide range of mutational events, we found that, in addition to demethylation, treatment with 5-Aza-dC induces γ-H2AX expression, a marker for DNA breaks, and both point mutations and genome rearrangements. To gain insight into the source of these mutations, we first tested the hypothesis that the mutagenic effect of 5-Aza-dC may be directly mediated through the DNA methyltransferase 1 (DNMT1) covalently trapped in 5-Aza-dC-substituted DNA. Knockdown of DNMT1 resulted in increased resistance to the cytostatic effects of 5-Aza-dC, delayed onset of γ-H2AX expression and a significant reduction in the frequency of genome rearrangements. There was no effect on the 5-Aza-dC-induced point mutations. An alternative mechanism for 5-Aza-dC-induced demethylation and genome rearrangements via activation-induced cytidine deaminase (AID) followed by base excision repair (BER) was found not to be involved. That is, 5-Aza-dC treatment did not significantly induce AID expression and inhibition of BER did not reduce the frequency of genome rearrangements. Thus, our results indicate that the formation of DNMT1 adducts is the prevalent mechanism of 5-Aza-dC-induced genome rearrangements, although hypomethylation per se may still contribute. As the therapeutic effects of 5-Aza-dC greatly depend on the presence of DNMT1, the expression level of DNA methyltransferases in tumors may serve as a prognostic factor for the efficacy of 5-Aza-dC treatment.