Tandemly repeated sequences are a major component of the eukaryotic genome. Although the general characteristics of tandem repeats have been well documented, the processes involved in their origin and maintenance remain unknown. In this study, a region on the paternal sex ratio (PSR) chromosome was analyzed to investigate the mechanisms of tandem repeat evolution. The region contains a junction between a tandem array of PSR2 repeats and a copy of the retrotransposon NATE, with other dispersed repeats (putative mobile elements) on the other side of the element. Little similarity was detected between the sequence of PSR2 and the region of NATE flanking the array, indicating that the PSR2 repeat did not originate from the underlying NATE sequence. However, a short region of sequence similarity (11/15 bp) and an inverted region of sequence identity (8 bp) are present on either side of the junction. These short sequences may have facilitated nonhomologous recombination between NATE and PSR2, resulting in the formation of the junction. Adjacent to the junction, the three most terminal repeats in the PSR2 array exhibited a higher sequence divergence relative to internal repeats, which is consistent with a theoretical prediction of the unequal exchange model for tandem repeat evolution. Other NATE insertion sites were characterized which show proximity to both tandem repeats and complex DNAs containing additional dispersed repeats. An ``accretion model'' is proposed to account for this association by the accumulation of mobile elements at the ends of tandem arrays and into ``islands'' within arrays. Mobile elements inserting into arrays will tend to migrate into islands and to array ends, due to the turnover in the number of intervening repeats.