Atomistic simulations and a dislocation-based analysis reveal the mechanism of carbon peapod fusion into double-walled nanotubes. They explain the trend of diameter increase for the emerging inner wall, driven by the reduction in its strain energy and the interwall van der Waals energy. Surprisingly, this is also accompanied by the systematic bias in the nanotube chirality, changing from zigzag toward armchair. This prediction agrees well with our experimental data and is further supported by the analysis of earlier observations.