Werner Syndrome (WS) is characterized by premature aging, genomic instability, and cancer. The combined impact of WRN helicase deficiency and limiting telomere reserves is central to disease pathogenesis. Here, we report that cells doubly deficient for telomerase and WRN helicase show chromosomal aberrations and elevated recombination rates between telomeres of sister chromatids. Somatic reconstitution of WRN function, but not a WRN helicase-deficient mutant, abolished telomere sister chromatid exchange (T-SCE), indicating that WRN normally represses T-SCEs. Elevated T-SCE was associated with greater immortalization potential and resultant tumors maintained telomeres via the alternative lengthening of telomere (ALT) pathway. We propose that the increased incidence of chromosomal instability and cancer in WS relates in part to aberrant recombinations between sister chromatids at telomeres, which facilitates the activation of ALT and engenders cancer-relevant chromosomal aberrations and tumor formation.