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The expansion of normally polymorphic CTG microsatellites in certain human genes has been identified as the causative mutation of a number of hereditary neurological disorders, including Huntington's disease and myotonic dystrophy. Here, we have investigated the effect of methyl-directed mismatch repair (MMR) on the stability of a (CTG)43 repeat in Escherichia coli over 140 generations and find two opposing effects. In contrast to orientation-dependent repeat instability in wild-type E. coli and yeast, we observed no orientation dependence in MMRE. coli cells and suggest that, for the repeat that we have studied, orientation dependence in wild-type cells is mainly caused by functional mismatch repair genes. Our results imply that slipped structures are generated during replication, causing single triplet expansions and contractions in MMR cells, because they are left unrepaired. On the other hand, we find that the repair of such slipped structures by the MMR system can go awry, resulting in large contractions. We show that these mutS-dependent contractions arise preferentially when the CTG sequence is encoded by the lagging strand. The nature of this orientation dependence argues that the small slipped structures that are recognized by the MMR system are formed primarily on the lagging strand of the replication fork. It also suggests that, in the presence of functional MMR, removal of 3 bp slipped structures causes the formation of larger contractions that are probably the result of secondary structure formation by the CTG sequence. We rationalize the opposing effects of MMR on repeat tract stability with a model that accounts for CTG repeat instability and loss of orientation dependence in MMR cells. Our work resolves a contradiction between opposing claims in the literature of both stabilizing and destabilizing effects of MMR on CTG repeat instability in E. coli.