Mammalian telomeres consist of non-coding TTAGGG repeats that are bound by the multi-protein complex 'shelterin', thus protecting chromosome ends from DNA repair mechanisms and degradation. Mammalian telomeric chromatin is enriched for the constitutive heterochromatin marks H3K9me3, H4K20me3 and HP1 (refs 2, 3, 4, 5, 6, 7). Similar to pericentric heterochromatin, telomeric heterochromatin is thought to be fundamental for the maintenance of chromosomal integrity. Here, we report that telomeric repeats are transcribed by DNA-dependent RNA polymerase II, which, in turn, interacts with the TRF1 shelterin protein. Telomeric RNAs (TelRNAs) contain UUAGGG repeats, are polyadenylated and are transcribed from the telomeric C-rich strand. Transcription of mammalian telomeres is regulated by several mechanisms, including developmental status, telomere length, cellular stress, tumour stage and chromatin structure. Using RNA-flourescent in situ hybridization (FISH), we show that TelRNAs are novel structural components of telomeric chromatin. Importantly, we provide evidence that TelRNAs block the activity of telomerase in vitro, suggesting that TelRNAs may regulate telomerase activity at chromosome ends. Our results indicate that TelRNAs are novel components of mammalian telomeres, which are anticipated to be fundamental for understanding telomere biology and telomere-related diseases, such as cancer and ageing.