You have just some minor mistakes. First, we need to get rid of output and (output); these bear no relation to the code. It seems you were working with a variable called output and then renamed it to out without fixing all the code. Moreover, (output) is a function call; it expects a function called output to exist.
Secondly, the result of append must be captured somehow; in the progn you're just discarding it. Here is a working version:
(defun foo (in i out)
(if (>= i 0)
(foo in (1- i) (cons (intern (string (elt in i))) out))
out))
Note also that instead of your (append (list X) Y), I'm using the more efficient and idiomatic (cons X Y). The result of this cons operation has to be passed to foo. The out argument is our accumulator that is threaded through the tail recursion; it holds how much of the list we have so far.
I.e. we can't have (progn <make-new-list> (foo ... <old-list>)); that just creates the new list and throws it away, and then just passes the old list to the recursive call. Since the old list initially comes as nil, we just keep passing along this nil and when the index hits zero, that's what pops out. We need (foo .... <make-new-list>), which is what I've done.
Tests:
[1]> (foo "" -1 nil)
NIL
[2]> (foo "a" 0 nil)
(|a|)
[3]> (foo "ab" 1 nil)
(|a| |b|)
[4]> (foo "abcd" 3 nil)
(|a| |b| |c| |d|)
[5]> (foo "abcd" 3 '(x y z))
(|a| |b| |c| |d| X Y Z)
Lastly, if you want the (|a| |b| |c| |d|) symbols to appear as (a b c d), you have to fiddle withreadtable-case.
Of course:
[6]> (foo "ABCD" 3 nil)
(A B C D)