The mouse agouti protein is a paracrine signaling molecule that causes yellow pigment synthesis. A pale ventral coloration distinguishes the light-bellied agouti (AW) from the agouti (A) allele, and is caused by expression of ventral-specific mRNA isoforms with a unique 5' untranslated exon. Molecular cloning demonstrates this ventral-specific exon lies within a 3.1-kb element that is duplicated in the opposite orientation 15-kb upstream to produce an interrupted palindrome and that similarity between the duplicated elements has been maintained by gene conversion. Orientation of the palindrome is reversed in A compared to AW, which suggests that mutation from one allele to the other is caused by intrachromosomal homologous recombination mediated by sequences within the duplicated elements. Analysis of 15 inbred strains of laboratory and wild-derived mice with Southern hybridization probes and closely linked microsatellite markers suggests six haplotype groups: one typical for most strains that carry AW (129/SvJ, LP/J, CE/J, CAST/Ei), one typical for most strains that carry A (Balb/cJ, CBA/J, FVB/N, PERA/Rk, RBB/Dn); and four that are atypical (MOLC/Rk, MOLG/Dn, PERA/Ei, PERC/Ei, SPRET/Ei, RBA/Dn). Our results suggest a model for molecular evolution of the agouti locus in which homologous recombination can produce a reversible switch in allelic identity.