Although vertebrate POT1 is thought to play a role in both telomere capping and length regulation, its function has proved difficult to analyze. We therefore generated a conditional cell line that lacks wild-type POT1 but expresses an estrogen receptor-POT1 fusion. The cells grow normally in tamoxifen, but drug removal causes loss of POT1 from the telomere, rapid cell cycle arrest, and eventual cell death. The arrested cells have a 4N DNA content, and addition of caffeine causes immediate entry into mitosis, suggesting a G(2) arrest due to an ATM- and/or ATR-mediated checkpoint. gammaH2AX accumulates at telomeres, indicating a telomeric DNA damage response, the likely cause of the checkpoint. However, POT1 loss does not cause degradation of the G-strand overhang. Instead, the amount of G overhang increases two- to threefold. Some cells eventually escape the cell cycle arrest and enter mitosis. They rarely exhibit telomere fusions but show severe chromosome segregation defects due to centrosome amplification. Our data indicate that vertebrate POT1 is required for telomere capping but that it functions quite differently from TRF2. Instead of being required for G-overhang protection, POT1 is required to suppress a telomeric DNA damage response. Our results also indicate significant functional similarities between POT1 and Cdc13 from budding yeast (Saccharomyces cerevisiae).