DNA double-strand breaks (DSBs) are among the most deleterious forms of DNA lesions in cells. Here we induced site-specific DSBs in yeast cells and monitored chromatin dynamics surrounding the DSB using Chromosome Conformation Capture (3C). We find that formation of a DSB within G1 cells is not sufficient to alter chromosome dynamics. However, DSBs formed within an asynchronous cell population result in large decreases in both intra- and interchromosomal interactions. Using live cell microscopy, we find that changes in chromosome dynamics correlate with relocalization of the DSB to the nuclear periphery. Sequestration to the periphery requires the nuclear envelope protein, Mps3p, and Mps3p-dependent tethering delays recombinational repair of a DSB and enhances gross chromosomal rearrangements. Furthermore, we show that components of the telomerase machinery are recruited to a DSB and that telomerase recruitment is required for its peripheral localization. Based on these findings, we propose that sequestration of unrepaired or slowly repaired DSBs to the nuclear periphery reflects a competition between alternative repair pathways.