A subset of sporadic colorectal tumors and most tumors developing in hereditary nonpolyposis colorectal cancer patients display frequent alterations in microsatellite sequences. Such tumors have been thought to manifest replication errors (RER+), but the basis for the alterations has remained conjectural. We demonstrate that the mutation rate of (CA)n repeats in RER+ tumor cells is at least 100-fold that in RER- tumor cells and show by in vitro assay that increased mutability of RER+ cells is associated with a profound defect in strand-specific mismatch repair. This deficiency was observed with microsatellite heteroduplexes as well as with heteroduplexes containing single base-base mismatches and affected an early step in the repair pathway. Thus, a true mutator phenotype exists in a subset of tumor cells, the responsible defect is likely to cause transitions and transversions in addition to microsatellite alterations, and a biochemical basis for this phenotype has been identified.