Tellico Reservoir was planned as an extension of nearby Fort Loudoun Reservoir. Tellico Dam serves to divert water through a short canal into Fort Loudoun, linking the two reservoirs in their joint functions of flood control, power production, and improved navigation. They help regulate flooding downstream, especially at Chattanooga. The canal also allows barges to enter the Little Tennessee River without a lock, thus significantly increasing commercial barge operations in the Valley.

Several recreation areas, which include boat ramps, day-use areas, fishing areas, and campgrounds, are available at Tellico. The reservoir offers excellent trout and bass fishing.

On Tellico's banks is a reconstruction of the original Fort Loudoun, which was built by the British during the French and Indian War. It was named for John Campbell, the fourth Earl of Loudoun, commander-in-chief of the British forces in North America at the time. Another nearby historic attraction is the Sequoyah Birthplace Museum, honoring the Cherokee genius who invented the Cherokee alphabet.