Heterochromatin domains play important roles in chromosome biology, organismal development, and aging, including centromere function, mammalian female X chromosome inactivation, and senescence-associated heterochromatin foci. In the fission yeast  Schizosaccharomyces pombe  and metazoans, heterochromatin contains histone H3 that is dimethylated at lysine 9. While factors required for heterochromatin have been identified, the dynamics of heterochromatin formation are poorly understood. Telomeres convert adjacent chromatin into heterochromatin. To form a new heterochromatic region in  S. pombe , an inducible DNA double-strand break (DSB) was engineered next to 48 bp of telomere repeats in euchromatin, which caused formation of a new telomere and the establishment and gradual spreading of a new heterochromatin domain. However, spreading was dynamic even after the telomere had reached its stable length, with reporter genes within the heterochromatin domain showing variegated expression. The system also revealed the presence of repeats located near the boundaries of euchromatin and heterochromatin that are oriented to allow the efficient healing of a euchromatic DSB to cap the chromosome end with a new telomere. Telomere formation in  S. pombe  therefore reveals novel aspects of heterochromatin dynamics and fail-safe mechanisms to repair subtelomeric breaks, with implications for similar processes in metazoan genomes.