Maintenance of a minimal telomere length is essential to prevent cellular senescence. When critically short telomeres arise in the absence of telomerase, they can be repaired by homology-directed repair (HDR) to prevent premature senescence onset. It is unclear why specifically the shortest telomeres are targeted for HDR. We demonstrate that the non-coding RNA TERRA accumulates as HDR-promoting RNA-DNA hybrids (R-loops) preferentially at very short telomeres. The increased level of TERRA and R-loops, exclusively at short telomeres, is due to a local defect in RNA degradation by the Rat1 and RNase H2 nucleases, respectively. Consequently, the coordination of TERRA degradation with telomere replication is altered at shortened telomeres. R-loop persistence at short telomeres contributes to activation of the DNA damage response (DDR) and promotes recruitment of the Rad51 recombinase. Thus, the telomere length-dependent regulation of TERRA and TERRA R-loops is a critical determinant of the rate of replicative senescence.