Autosomal-dominant dyskeratosis congenita is associated with heterozygous mutations in telomerase. To examine the dosage effect of telomerase, we generated a line of mTR+/- mice on the CAST/EiJ background, which has short telomeres. Interbreeding of heterozygotes resulted in progressive telomere shortening, indicating that limiting telomerase compromises telomere maintenance. In later-generation heterozygotes, we observed a decrease in tissue renewal capacity in the bone marrow, intestines, and testes that resembled defects seen in dyskeratosis congenita patients. The progressive worsening of disease with decreasing telomere length suggests that short telomeres, not telomerase level, cause stem cell failure. Further, wild-type mice derived from the late-generation heterozygous parents, termed wt*, also had short telomeres and displayed a germ cell defect, indicating that telomere length determines these phenotypes. We propose that short telomeres in mice that have normal telomerase levels can cause an occult form of genetic disease.