The E(var) 63AP mutation of Drosophila melanogaster was isolated in a genetic screen for P-element induced enhancers of wm4 variegation. Remobilization of the P-element in E(var)63AP resulted in a loss of its ability to enhance position-effect variegation (PEV) of wm4, indicating that the P-element in this mutant resulted in the E(var) phenotype. An allele of E(var)63AP, Su(var)63ALTR was isolated following mobilization of the P-element. Su(var)63ALTR was demonstrated to suppress PEV associated with the variegating rearrangements wm4 and bwVDe2. The P-element insert in E(var)63AP was located in the cytogenetic region 63A by in-situ hybridization and was shown to be inserted into the 3'LTR of a copy of the nomad retroelement. Two additional P-element containing lines were identified that also contained P-inserts into copies of the nomad element and were Su(var)s. The level of nomad transcription in the E(var)63AP and Su(var)63ALTR mutations was shown to correlate with their effect on PEV, suggesting that the nomad element may be directly involved in the regulation of chromatin structure. Several models to explain the effect of mutations in the nomad element on PEV and retroelement expression are presented.