Several mutations in Drosophila result from insertion of the gypsy retrotransposon. Gypsy insertion mutagenesis and its modulation by allele-specific modifier genes were investigated by inserting gypsy or fragments of it into the intron of the Drosophila hsp82 heat shock gene. With gypsy in the parallel orientation, nearly all transcripts in transfected cells and transformed pupae were truncated in the 5' long terminal repeat (LTR). Truncation also occurred in or near the 3' LTR. The 5' LTR polyadenylation signal was strongly potentiated by a downstream 326-bp internal gypsy segment in either orientation. Anti-parallel gypsy reduced the amount of normal transcript to a much smaller extent, and a low level of truncation occurred within gypsy. No evidence was found for effects of the gypsy insertions on the hsp82 promoter. Mutations in the allelespecific modifier genes su(f) and su(w alpha) had effects on the amounts of readthrough transcripts consistent with their genetic behavior, whereas the effects of mutations in su(Hw) were only partly in accord with genetic expectations.