Telomeres are specialized structures at the ends of chromosomes that consist of tandem repeats of the DNA sequence TTAGGG and several proteins that protect the DNA and regulate the plasticity of the telomeres. The telomere-associated protein TRF2 (telomeric repeat binding factor 2) is critical for the control of telomere structure and function; TRF2 dysfunction results in the exposure of the telomere ends and activation of ATM (ataxia telangiectasin mutated)-mediated DNA damage response. Recent findings suggest that telomere attrition can cause senescence or apoptosis of mitotic cells, but the function of telomeres in differentiated neurons is unknown. Here, we examined the impact of telomere dysfunction via TRF2 inhibition in neurons (primary embryonic hippocampal neurons) and mitotic neural cells (astrocytes and neuroblastoma cells). We demonstrate that telomere dysfunction induced by adenovirus-mediated expression of dominant-negative TRF2 (DN-TRF2) triggers a DNA damage response involving the formation of nuclear foci containing phosphorylated histone H2AX and activated ATM in each cell type. In mitotic neural cells DN-TRF2 induced activation of both p53 and p21 and senescence (as indicated by an up-regulation of beta-galactosidase). In contrast, in neurons DN-TRF2 increased p21, but neither p53 nor beta-galactosidase was induced. In addition, TRF2 inhibition enhanced the morphological, molecular and biophysical differentiation of hippocampal neurons. These findings demonstrate divergent molecular and physiological responses to telomere dysfunction in mitotic neural cells and neurons, indicate a role for TRF2 in regulating neuronal differentiation, and suggest a potential therapeutic application of inhibition of TRF2 function in the treatment of neural tumors.