Background: transposable elements (TEs) are responsible for the generation of chromosomal inversions in several groups of organisms. However, in Drosophila and other Dipterans, where inversions are abundant both as intraspecific polymorphisms and interspecific fixed differences, the evidence for a role of TEs is scarce. Previous work revealed that the transposon Galileo was involved in the generation of two polymorphic inversions of Drosophila buzzatii. Methodology/Principal Findings: to assess the impact of TEs in Drosophila chromosomal evolution and shed light on the mechanism involved, we isolated and sequenced the two breakpoints of another widespread polymorphic inversion from D. buzzatii, 2z3. In the non inverted chromosome, the 2z3 distal breakpoint was located between genes CG2046 and CG10326 whereas the proximal breakpoint lies between two novel genes that we have named Dlh and Mdp. In the inverted chromosome, the analysis of the breakpoint sequences revealed relatively large insertions (2,870-bp and 4,786-bp long) including two copies of the transposon Galileo (subfamily Newton), one at each breakpoint, plus several other TEs. The two Galileo copies: (i) are inserted in opposite orientation; (ii) present exchanged target site duplications; and (iii) are both chimeric. Conclusions/Significance: our observations provide the best evidence gathered so far for the role of TEs in the generation of Drosophila inversions. In addition, they show unequivocally that ectopic recombination is the causative mechanism. The fact that the three polymorphic D. buzzatii inversions investigated so far were generated by the same transposon family is remarkable and is conceivably due to Galileo's unusual structure and current (or recent) transpositional activity.