Yeast telomeres reversibly repress the transcription of adjacent genes, a phenomenon called telomere position effect (TPE). TPE is thought to result from Rap1 and Sir protein-mediated spreading of heterochromatin-like structures from the telomeric DNA inwards. Because Rap1p is associated with subtelomeric chromatin as well as with telomeric DNA, yeast telomeres are proposed to form fold-back or looped structures. TPE can be eliminated in trans by deleting SIR genes or in cis by transcribing through the C(1-3)A/TG(1-3) tract of a telomere. We show that the promoter of a telomere-linked URA3 gene was inaccessible to restriction enzymes and that accessibility increased both in a sir3 strain and upon telomere transcription. We also show that subtelomeric chromatin was hypoacetylated at histone H3 and at each of the four acetylatable lysines in histone H4 and that histone acetylation increased both in a sir3 strain and when the telomere was transcribed. When transcription through the telomeric tract occurred in G(1)-arrested cells, TPE was lost, demonstrating that activation of a silenced telomeric gene can occur in the absence of DNA replication. The loss of TPE that accompanied telomere transcription resulted in the rapid and efficient loss of subtelomeric Rap1p. We propose that telomere transcription disrupts core heterochromatin by eliminating Rap1p-mediated telomere looping. This interpretation suggests that telomere looping is critical for maintaining TPE.