Duplication of chromatin following DNA replication requires spatial reorganization of chromatin domains assisted by chromatin assembly factor CAF-1. Here, we tested the genomic consequences of CAF-1 loss and the function of chromatin assembly factor CAF-1 in heterochromatin formation. Genes located in heterochromatic regions are usually silent, and we found that this transcriptional repression persists in the absence of CAF-1 in Arabidopsis. However, using microarrays we observed that genes that are active during late S-phase, when heterochromatin is duplicated, were up-regulated in CAF-1 mutants. Arabidopsis CAF-1 mutants also have reduced cytological heterochromatin content; however, DNA methylation of pericentromeric repeats was normal, demonstrating that CAF-1 is not required for maintenance of DNA methylation. Instead, hypomethylation of the genome, which has only mild effects on the development of wild-type plants, completely arrested development of CAF-1 mutants. These results suggest that CAF-1 functions in heterochromatin formation. CAF-1 and DNA methylation, which is also needed for heterochromatin formation, have partially redundant functions that are essential for cell proliferation. Interestingly, transcriptional repression and heterochromatin compaction can be genetically separated, and CAF-1 is required only for the complete compaction of heterochromatin but not to maintain transcriptional repression of heterochromatic genes.