Mismatch repair deficiency is associated with carcinogenesis, increased spontaneous and induced mutagenesis, and resistance to methylating agents. In humans, leukemias and lymphomas arise in the background of mismatch repair deficiency, raising the possibility that hematopoiesis is abnormal as well. To address hematopoiesis in MSH2-/- mice, we collected marrow and performed serial transplantations of these cells, alone or mixed with wild-type cells, into lethally irradiated healthy mice. Transplant recipients were observed or treated with the methylating agent, temozolomide (TMZ). Methylating agent tolerance was evident by the competitive survival advantage of MSH2-/- marrow progenitors compared with wild-type cells after each TMZ exposure. However, serial repopulation by MSH2-/- cells was deficient compared with wild-type cells. In recipients of mixed populations, the MSH 2-/- cells were lost from the marrow, and mice receiving MSH2-/- cells plus TMZ could not be reconstituted in the third passage, whereas all wild-type cell recipients survived. No differences in telomere length, cell cycle distribution, or homing were observed, but an increase in microsatellite instability was seen in the MSH2-/- early progenitor colony-forming unit (CFU) and Sca+Kit+lin--derived clones. Thus, mismatch repair deficiency is associated with a hematopoietic repopulation defect and stem cell exhaustion because of accumulation of genomic instability.