Using Drosophila as a model system, we identified a stringent requirement for the conserved function of Ataxia Telangiectasia Mutated (ATM) in telomere protection during early embryonic development. Animals homozygous for a hypomorphic mutation in atm develop normally with minimal telomere dysfunction. However, mutant females produce inviable embryos that succumb to mitotic failure caused by covalent fusions of telomeric DNA. Interestingly, although the atm mutation encodes a premature stop codon, it must not have eliminated the production of the mutant protein, and the mutant protein retains kinase activity upon DNA damage. Moreover, although the embryonic phenotype of this mutation resembles that of hypomorphic mutations in the MRN complex, the function of MRN appears normal in the atm embryos. In contrast, there is a prominent reduction of the level of HipHop, an essential member of the Drosophila capping complex. How ATM functions in telomere protection remains poorly understood. The amenability of Drosophila embryos to molecular and biochemical investigations ensures that this newly identified mutation will facilitate future studies of ATM in telomere maintenance.