We have designed and constructed integration-defective retroviral vectors to explore their potential for gene targeting in mammalian cells. Two nonoverlapping deletion mutants of the bacterial neomycin resistance (neo) gene were used to detect homologous recombination events between viral and chromosomal sequences. Stable neo gene correction events were selected at a frequency of approximately 1 G418r cell per 3 x 10(6) infected cells. Analysis of the functional neo gene in independent targeted cell clones indicated that unintegrated retroviral linear DNA recombined with the target by gene conversion for variable distances into regions of nonhomology. In addition, transient neo gene correction events which were associated with the complete loss of the chromosomal target sequences were observed. These results demonstrated that retroviral vectors can recombine with homologous chromosomal sequences in rodent and human cells.