O⁶-Methylguanine (^MeG) is a highly cytotoxic DNA modification generated by S_N1-type methylating agents. Despite numerous studies implicating DNA replication, mismatch repair (MMR), and homologous recombination (HR) in ^MeG toxicity, its mode of action has remained elusive. We studied the molecular transactions in the DNA of yeast and mammalian cells treated with N-methyl-N′-nitro-N-nitrosoguanidine (MNNG). Although replication fork progression was unaffected in the first cell cycle after treatment, electron microscopic analysis revealed an accumulation of ^MeG- and MMR-dependent single-stranded DNA (ssDNA) gaps in newly replicated DNA. Progression into the second cell cycle required HR, while the following G₂ arrest required the continued presence of ^MeG. Yeast cells overcame this block, while mammalian cells generally failed to recover, and those that did contained multiple sister chromatid exchanges. Notably, the arrest could be abolished by removal of ^MeG after the first S phase. These new data provide compelling support for the hypothesis that MMR attempts to correct ^MeG/C or ^MeG/T mispairs arising during replication. Due to the persistence of ^MeG in the exposed template strand, repair synthesis cannot take place, which leaves single-stranded gaps behind the replication fork. During the subsequent S phase, these gaps cause replication fork collapse and elicit recombination and cell cycle arrest.