Depending on the species and the lymphoid organ, activation-induced cytidine deaminase (AID) expression triggers diversification of the rearranged immunoglobulin (Ig) genes by pseudo V (psiV) gene- templated gene conversion or somatic hypermutation. To investigate how AID can alternatively induce recombination or hypermutation, psiV gene deletions were introduced into the rearranged light chain locus of the DT40 B-cell line. We show that the stepwise removal of the psiV donors not only reduces and eventually abolishes Ig gene conversion, but also activates AID-dependent Ig hypermutation. This strongly supports a model in which AID induces a common modification in the rearranged V(D)J segment, leading to a conversion tract in the presence of nearby donor sequences and to a point mutation in their absence.