Cells that had undergone telomere dysfunction‐induced senescence secrete numerous cytokines and other molecules, collectively called the senescence‐associated secretory phenotype (SASP). Although certain SASP factors have been demonstrated to promote cellular senescence in neighboring cells in a paracrine manner, the mechanisms leading to bystander senescence and the functional significance of these effects are currently unclear. Here, we demonstrate that TGF‐β1, a component of the SASP, causes telomere dysfunction in normal somatic human fibroblasts in a Smad3/NOX4/ROS‐dependent manner. Surprisingly, instead of activating cellular senescence, TGF‐β1‐induced telomere dysfunction caused fibroblasts to transdifferentiate into α‐SMA‐expressing myofibroblasts, a mesenchymal and contractile cell type that is critical for wound healing and tissue repair. Despite the presence of dysfunctional telomeres, transdifferentiated cells acquired the ability to contract collagen lattices and displayed a gene expression signature characteristic of functional myofibroblasts. Significantly, the formation of dysfunctional telomeres and downstream p53 signaling was necessary for myofibroblast transdifferentiation, as suppressing telomere dysfunction by expression of hTERT, inhibiting the signaling pathways that lead to stochastic telomere dysfunction, and suppressing p53 function prevented the generation of myofibroblasts in response to TGF‐β1 signaling. Furthermore, inducing telomere dysfunction using shRNA against TRF2 also caused cells to develop features that are characteristic of myofibroblasts, even in the absence of exogenous TGF‐β1. Overall, our data demonstrate that telomere dysfunction is not only compatible with cell functionality, but they also demonstrate that the generation of dysfunctional telomeres is an essential step for transdifferentiation of human fibroblasts into myofibroblasts.