Telomeres are specialized structures at the end of eukaryotic chromosomes that are required to preserve genome integrity, chromosome stability and nuclear architecture. Telomere maintenance and function are established epigenetically in several eukaryotes. However, the exact chromatin enzymatic modifications regulating telomere homeostasis are poorly understood. In Drosophila melanogaster, telomere length and stability are maintained through the retrotransposition of specialized telomeric sequences and by the specific loading of protecting capping proteins, respectively. Here, we show that the loss of the essential and evolutionarily conserved histone deacetylase Rpd3, the homolog of mammalian HDAC1, causes aberrant telomeric fusions on polytene chromosome ends. Remarkably, these telomere fusion defects are associated with a marked decrease of histone H4 acetylation, as well as an accumulation of heterochromatic epigenetic marks at telomeres, including histone H3K9 trimethylation and the heterochromatic protein HP2. Our work suggests that Drosophila telomere structure is epigenetically regulated by the histone deacetylase Rpd3.