DNA palindromes often colocalize in cancer cells with chromosomal regions that are predisposed to gene amplification. The molecular mechanisms by which palindromes can cause gene amplification are largely unknown. Using yeast as a model system, we found that hairpin-capped double-strand breaks (DSBs) occurring at the location of human Alu-quasipalindromes lead to the formation of intrachromosomal amplicons with large inverted repeats (equivalent to homogeneously staining regions in mammalian chromosomes) or extrachromosomal palindromic molecules (equivalent to double minutes [DM] in mammalian cells). We demonstrate that the specific outcomes of gene amplification depend on the applied selection, the nature of the break, and the chromosomal location of the amplified gene relative to the site of the hairpin-capped DSB. The rules for the palindrome-dependent pathway of gene amplification defined in yeast may operate during the formation of amplicons in human tumors.