The long non-coding telomeric RNA transcript TERRA, in the form of an RNA-DNA duplex, regulates telomere recombination. In a screen for nucleases that affects telomere recombination, mutations in DNA2, EXO1, MRE11 and SAE2 cause severe delay in type II survivor formation, indicating that type II telomere recombination is mediated through a mechanism similar to repairing double-strand breaks. On the other hand, mutation in RAD27 results in early formation of type II recombination, suggesting that RAD27 acts as a negative regulator in telomere recombination. RAD27 encodes a flap endonuclease that plays a role in DNA metabolism, including replication, repair and recombination. We demonstrate that Rad27 suppresses the accumulation of the TERRA-associated R-loop and selectively cleaves TERRA of R-loop and double-flapped structures in vitro. Moreover, we show that Rad27 negatively regulates single-stranded C-rich telomeric DNA circles (C-circles) in telomerase-deficient cells, revealing a close correlation between R-loop and C-circles during telomere recombination. These results demonstrate that Rad27 participates in telomere recombination by cleaving TERRA in the context of an R-loop or flapped RNA-DNA duplex, providing mechanistic insight into how Rad27 maintains chromosome stability by restricting the accumulation of the R-loop structure within the genome.