The tumour suppressor gene (Rb1) is necessary for the maintenance of telomere integrity in osteoblastic cells. We now show that the compaction of telomeric chromatin and the appropriate histone modifications of telomeric DNA are both dependent upon Rb1-mediated transcription of the telomere-derived long non-coding RNA TERRA. Expression of TERRA was reduced in Rb1 haploinsufficient cells, and further decreased by shRNA-mediated reduction of residual Rb1 expression. Restoration of Rb1 levels through lentiviral transduction was sufficient to reestablish both transcription of TERRA and condensation of telomeric chromatin. The human chromosome 15q TERRA promoter contains predicted retinoblastoma control elements, and was able to confer Rb1-dependent transcription upon a promoterless reporter gene. Chromatin immunoprecipitation revealed preferential binding of phosphorylated over non-phosphorylated Rb1 at the TERRA promoter. As Rb1-deficient cells show increased genomic instability we suggest that this novel non-canonical action of Rb1 may contribute to the tumour suppressive actions of Rb1.