Limitless reproductive potential is one of the hallmarks of cancer cells. This ability is due to the maintenance of telomeres, erosion of which causes cellular senescence or death. While most cancer cells activate telomerase, a telomere-elongating enzyme, it remains elusive as to why cancer cells often maintain shorter telomeres than the cells in the surrounding normal tissues. Here, we show that forced telomere elongation in cancer cells promotes their differentiation in vivo. We elongated the telomeres of human prostate cancer cells that possess short telomeres by enhancing their telomerase activity. The resulting cells had long telomeres and retained the ability to form tumors in nude mice. Strikingly, these tumors exhibited many duct-like structures and reduced N-cadherin expression, reminiscent of well-differentiated adenocarcinoma. These changes were caused by telomere elongation and not by enhanced telomerase activity. Gene expression profiling revealed that tumor formation was accompanied by the expression of innate immune system-related genes, which have been implicated in maintaining tumor cells in an undifferentiated state and poor-prognosis cancers. In tumors derived from the telomere-elongated cells, upregulation of such gene sets is not observed. Our observations suggest a functional contribution of short telomeres to tumor malignancy by regulation of cancer cell differentiation.