ATRX belongs to the family of SWI2/SNF2-like ATP-dependent nucleosome remodeling molecular motor proteins. Mutations of the human ATRX gene result in a severe genetic disorder termed X-linked alpha-thalassemia mental retardation (ATR-X) syndrome. Here we perform biochemical and genetic analyses of the Drosophila melanogaster ortholog of ATRX. The loss of function allele of the Drosophila ATRX/XNP gene is semilethal. Drosophila ATRX is expressed throughout development in two isoforms, p185 and p125. ATRX185 and ATRX125 form distinct multisubunit complexes in fly embryo. The ATRX185 complex comprises p185 and heterochromatin protein HP1a. Consistently, ATRX185 but not ATRX125 is highly concentrated in pericentric beta-heterochromatin of the X chromosome in larval cells. HP1a strongly stimulates biochemical activities of ATRX185 in vitro. Conversely, ATRX185 is required for HP1a deposition in pericentric beta-heterochromatin of the X chromosome. The loss of function allele of the ATRX/XNP gene and mutant allele that does not express p185 are strong suppressors of position effect variegation. These results provide evidence for essential biological functions of Drosophila ATRX in vivo and establish ATRX as a major determinant of pericentric beta-heterochromatin identity.