To study the mechanisms by which deacetylases regulate transcription by RNA polymerase II, we investigated the biochemical properties of purified recombinant Drosophila histone deacetylase 1 (dHDAC1, also known as dRPD3). We found that purified dHDAC1 and Gal4-dHDAC1 polypeptides possess substantial deacetylase activity. Thus, deacetylation by dHDAC1 does not require any additional cofactors. Gal4-dHDAC1, but not dHDAC1, was observed to repress transcription in vitro by about 2-3-fold from chromatin templates, but not from naked DNA templates, in a Gal4 site-dependent manner. This magnitude of repression is similar to that commonly seen by deacetylases in vivo, as assessed by treatment of cells with deacetylase inhibitors. Transcriptional repression by Gal4-dHDAC1 was blocked by the deacetylase inhibitor, FR901228, and thus, deacetylase activity correlates with repression. Single round transcription analyses showed that Gal4-dHDAC1 reduces the absolute number of productive initiation complexes with chromatin templates. Moreover, with chromatin templates that were assembled with completely purified components, Gal4-dHDAC1 was found to deacetylate nucleosomal histones as well as to repress transcription. These experiments provide biochemical evidence for the requirement of chromatin for transcriptional repression by dHDAC1 and further show that dHDAC1 acts to repress the transcription initiation process.