Telomeres distinguish chromosome ends from double-strand breaks (DSBs) and prevent chromosome fusion. However, telomeres can also interfere with DNA repair, as shown by a deficiency in nonhomologous end joining (NHEJ) and an increase in large deletions at telomeric DSBs. The sensitivity of telomeric regions to DSBs is important in the cellular response to ionizing radiation and oncogene-induced replication stress, either by preventing cell division in normal cells, or by promoting chromosome instability in cancer cells. We have previously proposed that the telomeric protein TRF2 causes the sensitivity of telomeric regions to DSBs, either through its inhibition of ATM, or by promoting the processing of DSBs as though they are telomeres, which is independent of ATM. Our current study addresses the mechanism responsible for the deficiency in repair of DSBs near telomeres by combining assays for large deletions, NHEJ, small deletions, and gross chromosome rearrangements (GCRs) to compare the types of events resulting from DSBs at interstitial and telomeric DSBs. Our results confirm the sensitivity of telomeric regions to DSBs by demonstrating that the frequency of GCRs is greatly increased at DSBs near telomeres and that the role of ATM in DSB repair is very different at interstitial and telomeric DSBs. Unlike at interstitial DSBs, a deficiency in ATM decreases NHEJ and small deletions at telomeric DSBs, while it increases large deletions. These results strongly suggest that ATM is functional near telomeres and is involved in end protection at telomeric DSBs, but is not required for the extensive resection at telomeric DSBs. The results support our model in which the deficiency in DSB repair near telomeres is a result of ATM-independent processing of DSBs as though they are telomeres, leading to extensive resection, telomere loss, and GCRs involving alternative NHEJ.