Outcomes for neurosurgery patients can be improved by enhancing intraoperative navigation and guidance. Current navigation systems do not accurately account for intraoperative brain deformation. So far, most studies of brain deformation have focused on brain shift, whereas this paper focuses on the brain deformation due to retraction. The heart of our system is a 3D nonrigid registration technique using a biomechanical model driven by the deformations of key surfaces tracked between two intraoperative images. The key surfaces, e.g., the whole-brain region boundary and the lips of the retraction cut, thus deform due to the combination of gravity and retractor deployment. The tissue discontinuity due to retraction is handled via the eXtended Finite Element Method (XFEM), which has the appealing feature of being able to handle arbitrarily shaped discontinuity without any remeshing. Our approach is shown to significantly improve the alignment of intraoperative MRI.