DNA double strand breaks in mammalian cells are primarily repaired by homologous recombination and non-homologous end joining (NHEJ). NHEJ may either be error-free or mutagenic with deletions or insertions at the joint. Recent studies showed that DNA ends can also be joined via microhomologous sequences flanking the break point especially when proteins responsible for NHEJ, such as Ku, are absent. Microhomology-mediated end joining (MHEJ) is always accompanied by a deletion that spans one of the two homologous sequences and the intervening sequence, if any. In this study we evaluated several factors affecting the relative contribution of MHEJ to DNA end joining using nuclear extracts and DNA substrates containing 10-bp repeats at the ends. We found that the occurrence of MHEJ is determined by the relative abundance of nuclear proteins. At low DNA/protein ratios, an error-free end-joining mechanism predominated over MHEJ. As the DNA/protein ratio increased, MHEJ became predominant. We show that the nuclear proteins that contribute to the inhibition of the error-prone MHEJ include Ku and histone H1. Treatment of extracts with flap endonuclease 1 antiserum significantly reduced MHEJ. Addition of a 17-bp intervening sequence between the microhomologous sequences significantly reduced the efficiency of MHEJ. Thus, this cell-free assay provides a platform for evaluating factors modulating end joining.