We have adapted the meiotic recombination hotspot cog of Neurospora crassa for shuffling exogenous DNA, providing a means of generating novel genes in situ from sequences introduced into chromosomes. Genes to be diversified are inserted between the his-3 locus and cog. Diversification crosses are heterozygous both for alleles of the exogenous DNA and for auxotrophic alleles of his-3. Progeny selected for ability to grow without histidine supplementation are enriched for exchange events within the exogenous DNA. Exchange events initiated by cog can propagate past DNA sequences mismatched for more than 370 bp and complete exchanges in patches of matched sequence as short as 24 bp, parameters that make the system suited for use in the directed evolution of genes for protein engineering. Here we demonstrate the system by shuffling human immunoglobulin kappa chain genes and also endoglucanase genes derived from different species of fungi.