To assess the involvement of terminal transferase in generating immunoglobulin diversity, the mutagenic potential of this enzyme has been measured. The frequency of single base substitutions during copying of phi X174 DNA by DNA polymerase beta is increased by, at most, 3-fold upon the addition of terminal transferase. However, terminal transferase is highly mutagenic, either alone or with DNA polymerase beta, in a forward mutation assay using M13mp2 DNA. The frequency of complex mutants, as determined by DNA sequence, is increased by greater than 100-fold. These mutants involve the deletion of a variable number of bases initially present in the template sequence and the addition of a sequence of nucleotides rich in guanine residues. Analysis of these mutants suggests an antibody diversity model implicating terminal transferase in the imprecise linkage of variable, joining, and diversity segments during the formation of functional immunoglobulin genes.