Effective divisors on bar{M}_g, curves on K3 surfaces and the Slope Conjecture

We carry out a detailed intersection theoretic analysis of the Deligne-Mumford compactification of the divisor on M_{10} consisting of curves sitting on K3 surfaces. This divisor is not of classical Brill-Noether type, and is known to give a counterexample to the Slope Conjecture. The computation relies on the fact that this divisor has four different incarnations as a geometric subvariety of the moduli space of curves, one of them as a higher rank Brill-Noether divisor consisting of curves with an exceptional rank 2 vector bundle. As an application we describe the birational nature of the moduli space of n-pointed curves of genus 10, for all n. We also show that on M_{11} there are effective divisors of minimal slope and having large Iitaka dimension. This seems to contradict the belief that on M_g the classical Brill-Noether divisors are essentially the only ones of slope 6+12/(g+1).