The alternative nonhomologous end-joining (alt-NHEJ) machinery facilitates a number of genomic rearrangements, some of which can lead to cellular transformation. This error-prone repair pathway is triggered upon telomere de-protection to promote the formation of deleterious chromosome end-to-end fusions1,2,3. Using next-generation sequencing technology, we found that repair by alt-NHEJ yields non-TTAGGG nucleotide insertions at fusion breakpoints of dysfunctional telomeres. Investigating the enzymatic activity responsible for the random insertions enabled us to identify Polymerase theta (Polθ; encoded by PolQ) as a critical alt-NHEJ factor in mammalian cells. PolQ inhibition suppresses alt-NHEJ at dysfunctional telomeres, and hinders chromosomal translocations at non-telomeric loci. In addition, we found that PolQ loss results in increased rates of homology directed repair (HDR), evident by recombination of dysfunctional telomeres and accumulation of Rad51 at double stranded breaks. Lastly, we show that depletion of PolQ has a synergistic impact on cell survival in the absence of BRCA genes, suggesting that the inhibition of this mutagenic polymerase represents a valid therapeutic avenue for tumors carrying mutations in HDR genes.