Here, we address the role of the MRN (Mre11/Rad50/Nbs1) complex in the response to telomeres rendered dysfunctional by deletion of the shelterin component TRF2. Using conditional NBS1/TRF2 double-knockout MEFs, we show that MRN is required for ATM signaling in response to telomere dysfunction. This establishes that MRN is the only sensor for the ATM kinase and suggests that TRF2 might block ATM signaling by interfering with MRN binding to the telomere terminus, possibly by sequestering the telomere end in the t-loop structure. We also examined the role of the MRN/ATM pathway in nonhomologous end joining (NHEJ) of damaged telomeres. NBS1 deficiency abrogated the telomere fusions that occur in G(1), consistent with the requirement for ATM and its target 53BP1 in this setting. Interestingly, NBS1 and ATM, but not H2AX, repressed NHEJ at dysfunctional telomeres in G(2), specifically at telomeres generated by leading-strand DNA synthesis. Leading-strand telomere ends were not prone to fuse in the absence of either TRF2 or MRN/ATM, indicating redundancy in their protection. We propose that MRN represses NHEJ by promoting the generation of a 3' overhang after completion of leading-strand DNA synthesis. TRF2 may ensure overhang formation by recruiting MRN (and other nucleases) to newly generated telomere ends. The activation of the MRN/ATM pathway by the dysfunctional telomeres is proposed to induce resection that protects the leading-strand ends from NHEJ when TRF2 is absent. Thus, the role of MRN at dysfunctional telomeres is multifaceted, involving both repression of NHEJ in G(2) through end resection and induction of NHEJ in G(1) through ATM-dependent signaling.