The long noncoding telomeric repeat containing RNA (TERRA) is expressed at chromosome ends. TERRA upregulation upon experimental manipulation or in ICF (immunodeficiency, centromeric instability, facial anomalies) patients correlates with short telomeres. To study the mechanism of telomere length control by TERRA in Saccharomyces cerevisiae, we mapped the transcriptional start site of TERRA at telomere 1L and inserted a doxycycline regulatable promoter upstream. Induction of TERRA transcription led to telomere shortening of 1L but not of other chromosome ends. TERRA interacts with the Exo1-inhibiting Ku70/80 complex, and deletion of EXO1 but not MRE11 fully suppressed the TERRA-mediated short telomere phenotype in presence and absence of telomerase. Thus TERRA transcription facilitates the 5'-3' nuclease activity of Exo1 at chromosome ends, providing a means to regulate the telomere shortening rate. Thereby, telomere transcription can regulate cellular lifespan through modulation of chromosome end processing activities.