Abstract Telomeres are elongated by the enzyme telomerase, which contains a template-bearing RNA (TER or TERC) and a protein reverse transcriptase. Overexpression of a particular mutant human TER with a mutated template sequence (MT-hTer-47A) in telomerase-positive cancer cells causes incorporation of mutant telomeric sequences, telomere uncapping, and initiation of a DNA damage response, ultimately resulting in cell growth inhibition and apoptosis. The DNA damage pathways underlying these cellular effects are not well understood. Here, we show that the ataxia-telangiectasia mutated (ATM) protein is activated and forms telomeric foci in response to MT-hTer-47A expression. Depletion of ATM from two cancer cell lines, including the p53-mutant UM-UC-3 bladder cancer line, rendered the cells largely unresponsive to MT-hTer-47A. Relative to ATM-competent controls, ATM-depleted cells showed increased proliferation and clonogenic survival and reduced cell death following MT-hTer-47A treatment. In contrast, ATM depletion sensitized the cancer cells to treatment with camptothecin, a topoisomerase inhibitor that induces DNA double-strand breaks. We show that the effects of ATM depletion on the MT-hTer-47A response were not due to decreased expression of MT-hTer-47A or reduced activity of telomerase at the telomere. Instead, ATM depletion allowed robust cancer cell growth despite the continued presence of dysfunctional telomeres containing mutant sequence. Notably, the number of end-to-end telomere fusions induced by MT-hTer-47A treatment was markedly reduced in ATM-depleted cells. Our results identify ATM as a key mediator of the MT-hTer-47A dysfunctional telomere response, even in cells lacking wild-type p53, and provide evidence that telomere fusions contribute to MT-hTer-47A cytotoxicity. [Cancer Res 2008;68(13):5309–17]