Expression of a neomycin phosphotransferase II (NPTII) gene has been designed to be regulated by an FLP-mediated switching of the orientation of the NPTII coding region located on the invertible DNA segment in episomal yeast plasmids. Inversion of the segment from inverted to direct orientation with respect to the promoter resulted in a dramatic increase in G418 resistance. FLP also promoted a double reciprocal exchange between the transforming and the resident 2-microns plasmid, leading to insertion of the FLP and REP2 genes into the transforming plasmid. The results demonstrate a possible use of FLP recombinase for 'phase variation'-type regulation of gene expression and gene replacement in eukaryotic cells.