Telomerase is a multisubunit enzyme that maintains genome stability through its role in telomere replication. Although the Est3 protein is long recognized as an essential telomerase component, how it associates with and functions in the telomerase complex has remained enigmatic. Here we provide the first evidence of a direct interaction between Saccharomyces cerevisiae Est3p and the catalytic protein subunit (Est2p) by demonstrating that recombinant Est3p binds the purified telomerase essential N-terminal (TEN) domain of Est2p in vitro. Mutations in a small cluster of amino acids predicted to lie on the surface of Est3p disrupt this interaction with Est2p, reduce assembly of Est3p with telomerase in vivo, and cause telomere shortening and senescence. We also show that recombinant Est3p stimulates telomerase activity above basal levels in vitro in a manner dependent on the Est2p TEN domain interaction. Together, these results define a direct binding interaction between Est3p and Est2p and reconcile the effect of S. cerevisiae Est3p with previous experiments showing that Est3p homologs in related yeast species influence telomerase activity. Additionally, it contributes functional support to the idea that Est3p is structurally related to the mammalian shelterin protein, TPP1, which also influences telomerase activity through interaction with the Est2p homolog, TERT.