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enter image description here

What is causing this effect? Same thing is happening when I try looptools -> circle.

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    $\begingroup$ Have you tried doing Apply Scale on your mesh? $\endgroup$
    – Rich Sedman
    Jan 6, 2017 at 11:10

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The problem is due to the mesh having been resized without applyig the new scale and the solution is to Apply Scale. This can be achieved by selecting the object (in Object mode), pressing Ctrl-A and selecting Scale.

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