The short arms of the ten acrocentric human chromosomes share several repetitive DNAs, including ribosomal RNA genes (rDNA). The rDNA arrays correspond to nucleolar organizing regions that coalesce each cell cycle to form the nucleolus. Telomere disruption by expressing a mutant version of telomere binding protein TRF2 (dnTRF2) causes non-random acrocentric fusions, as well as large-scale nucleolar defects. The mechanisms responsible for acrocentric chromosome sensitivity to dysfunctional telomeres are unclear. In this study, we show that TRF2 normally associates with the nucleolus and rDNA. However, when telomeres are crippled by dnTRF2 or RNAi knockdown of TRF2, gross nucleolar and chromosomal changes occur. We used the controllable dnTRF2 system to precisely dissect the timing and progression of nucleolar and chromosomal instability induced by telomere dysfunction, demonstrating that nucleolar changes precede the DNA damage and morphological changes that occur at acrocentric short arms. The rDNA repeat arrays on the short arms decondense, and are coated by RNA polymerase I transcription binding factor UBF, physically linking acrocentrics to one another as they become fusogenic. These results highlight the importance of telomere function in nucleolar stability and structural integrity of acrocentric chromosomes, particularly the rDNA arrays. Telomeric stress is widely accepted to cause DNA damage at chromosome ends, but our findings suggest that it also disrupts chromosome structure beyond the telomere region, specifically within the rDNA arrays located on acrocentric chromosomes. These results have relevance for Robertsonian translocation formation in humans and mechanisms by which acrocentric-acrocentric fusions are promoted by DNA damage and repair.