PALB2 is an integral component of the BRCA complex important for recombinational DNA repair. However, exactly how this activity is regulated in vivo remains unexplored. Here we provide evidence to show that MRG15 is a novel PALB2-associated protein that ensures regulated recombination events. We found that the direct interaction between MRG15 and PALB2 is mediated by an evolutionarily conserved region on PALB2. Intriguingly, although damage-induced RAD51 foci formation and mitomycin C sensitivity appeared normal in MRG15-binding defective PALB2 mutants, these cells exhibited a significant increase in gene conversion rates. Consistently, we found that abrogation of the PALB2-MRG15 interaction resulted in elevated sister chromatid exchange frequencies. Our results suggest that loss of the PALB2-MRG15 interaction relieved the cells with the suppression of sister chromatid exchange and therefore led to a hyper-recombination phenotype in the gene conversion assay. Together, our study indicated that although PALB2 is required for proficient homologous recombination, it could also govern the choice of templates used in homologous recombination repair.