We show that in budding yeast large rDNA deletions arise frequently and cause an increase in telomeric and mating-type gene silencing proportional to repeat loss. Paradoxically, this increase in silencing is correlated with a highly specific down-regulation of SIR2, which encodes a deacetylase enzyme required for silencing. These apparently conflicting observations suggest that a large nucleolar pool of Sir2 is released upon rDNA loss and made available for telomeric and HM silencing, as well as down-regulation of SIR2 itself. Indeed, we present evidence for a reduction in the fraction of Sir2 colocalizing with the nucleolar marker Nop1, and for SIR2 autoregulation. Despite a decrease in the fraction of nucleolar Sir2, and in overall Sir2 protein levels, short rDNA strains display normal rDNA silencing and a lifespan indistinguishable from wild type. These observations reveal an unexpectedly large clonal variation in rDNA cluster size and point to the existence of a novel regulatory circuit, sensitive to rDNA copy number, that balances nucleolar and nonnucleolar pools of Sir2 protein.