Telomere shortening limits the proliferative capacity of a cell, but perhaps surprisingly, shortening is also known to be associated with increased rates of tumor initiation. A current hypothesis suggests that telomere dysfunction increases tumor initiation by induction of chromosomal instability, but that initiated tumors need to reactivate telomerase for genome stabilization and tumor progression. This concept has not been tested in vivo, since appropriate mouse models were lacking. Here, we analyzed hepatocarcinogenesis in a mouse model of inducible telomere dysfunction on a telomerase-proficient background, in telomerase knockout mice with chronic telomere dysfunction (G3 mTerc^–/–), and in WT mice with functional telomeres and telomerase. Transient or chronic telomere dysfunction enhanced the rates of chromosomal aberrations during hepatocarcinogenesis, but only telomerase-proficient mice exhibited significantly increased rates of macroscopic tumor formation in response to telomere dysfunction. In contrast, telomere dysfunction resulted in pronounced accumulation of DNA damage, cell-cycle arrest, and apoptosis in telomerase-deficient liver tumors. Together, these data provide in vivo evidence that transient telomere dysfunction during early or late stages of tumorigenesis promotes chromosomal instability and carcinogenesis in telomerase-proficient mice.