DRD1 is a SWI/SNF-like protein that cooperates with a plant-specific RNA polymerase, Pol IVb, to facilitate RNA-directed de novo methylation and silencing of homologous DNA. Screens to identify endogenous targets of this pathway in Arabidopsis revealed intergenic regions and plant genes located primarily in euchromatin. Many putative targets are near retrotransposon LTRs or other intergenic sequences that encode short RNAs, which might epigenetically regulate adjacent genes. Consistent with this, derepression of a solo LTR in drd1 and pol IVb mutants was accompanied by reduced cytosine methylation and transcriptional upregulation of neighboring sequences. The solo LTR and several other LTRs that flank reactivated targets are associated with euchromatic histone modifications but little or no H3K9 dimethylation, a hallmark of constitutive heterochromatin. By contrast, LTRs of retrotransposons that remain silent in the mutants despite reduced cytosine methylation lack euchromatic marks and have H3K9 dimethylation. We propose that DRD1 and Pol IVb establish a basal level of silencing that can potentially be reversed in euchromatin, and further reinforced in heterochromatin by other proteins that induce more stable modifications.