Extrachromosomal telomeric circles are commonly invoked as important players in telomere maintenance, but their origin has remained elusive. Using electron microscopy analysis on purified telomeres we show that, apart from known structures, telomeric repeats accumulate internal loops (i-loops) that occur in the proximity of nicks and single-stranded DNA gaps. I-loops are induced by single-stranded damage at normal telomeres and represent the majority of telomeric structures detected in ALT (Alternative Lengthening of Telomeres) tumor cells. Our data indicate that i-loops form as a consequence of the exposure of single-stranded DNA at telomeric repeats. Finally, we show that these damage-induced i-loops can be excised to generate extrachromosomal telomeric circles resulting in loss of telomeric repeats. Our results identify damage-induced i-loops as a new intermediate in telomere metabolism and reveal a simple mechanism that links telomere damage to the accumulation of extrachromosomal telomeric circles and to telomere erosion.