Abstract Mutations in the gene for Su(var)3-9 are dominant suppressors of position-effect variegation (PEV). We show that SU(VAR)3-9 is a chromatin-associated protein and identify the large multicopy histone gene cluster (HIS-C) as one of its target loci. The organization of nucleosomes over the entire HIS-C region is altered in Su(var)3-9 mutants and there is a concomitant increase in expression of the histone genes. SU(VAR)3-9 is a histone H3 methyltransferase and, using chromatin immunoprecipitation, we show that SU(VAR)3-9 is present at the HIS-C locus and that the histone H3 at the HIS-C locus is methylated. We propose that SU(VAR)3-9 is involved in packaging HIS-C into a distinct chromatin domain that has some of the characteristics of β-heterochromatin. We suggest that methylation of histone H3 is important for the chromatin structure at HIS-C. The chromosomal deficiency for the HIS-C is also a suppressor of PEV. In contrast to what might be expected, we show that hemizygosity for the HIS-C locus leads to a substantial increase in the histone transcripts.