Drosophila telomeres are sequence-independent structures that are maintained by transposition to chromosome ends of three specialized retroelements (HeT-A, TART and TAHRE; collectively designated as HTT) rather than telomerase activity. Fly telomeres are protected by the terminin complex (HOAP-HipHop-Moi-Ver) that localizes and functions exclusively at telomeres and by non-terminin proteins that do not serve telomere-specific functions. Although all Drosophila telomeres terminate with HTT arrays and are capped by terminin, they differ in the type of subtelomeric chromatin; the Y, XR, and 4L HTT are juxtaposed to constitutive heterochromatin, while the XL, 2L, 2R, 3L and 3R HTT are linked to the TAS repetitive sequences; the 4R HTT is associated with a chromatin that has features common to both euchromatin and heterochromatin. Here we show that mutations in pendolino (peo) cause telomeric fusions (TFs). The analysis of several peo mutant combinations showed that these TFs preferentially involve the Y, XR and 4th chromosome telomeres, a TF pattern never observed in the other 10 telomere-capping mutants so far characterized. peo encodes a non-terminin protein homologous to the E2 variant ubiquitin-conjugating enzymes. The Peo protein directly interacts with the terminin components, but peo mutations do not affect telomeric localization of HOAP, Moi, Ver and HP1a, suggesting that the peo-dependent telomere fusion phenotype is not due to loss of terminin from chromosome ends. peo mutants are also defective in DNA replication and PCNA recruitment. However, our results suggest that general defects in DNA replication are unable to induce TFs in Drosophila cells. We thus hypothesize that DNA replication in Peo-depleted cells results in specific fusigenic lesions concentrated in heterochromatin-associated telomeres. Alternatively, it is possible that Peo plays a dual function being independently required for DNA replication and telomere capping.