Tellico Lake was planned as an extension of nearby Fort Loudoun Reservoir by TVA. Tellico Dam was built in 1979 and 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. Tellico Lake and Fort Loudoun Lake 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.

On Tellico Lake'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.