Cryptic unstable transcripts (CUTs) are synthesized from intra- and intergenic regions in Saccharomyces cerevisiae and are rapidly degraded by RNA surveillance pathways, but their function(s) remain(s) elusive. Here, we show that an antisense TY1 CUT, starting within the Ty1 retrotransposon and encompassing the promoter 5′ long terminal repeat (LTR), mediates RNA-dependent gene silencing and represses Ty1 mobility. We show that the Ty1 regulatory RNA is synthesized by RNA polymerase II, polyadenylated, and destabilized by the cytoplasmic 5′ RNA degradation pathway. Moreover, the Ty1 regulatory RNA represses Ty1 transcription and transposition in trans by acting on the de novo transcribed TY1 RNA. Consistent with a transcriptional regulation mechanism, we show that RNA polymerase II occupancy is reduced on the Ty1 chromatin upon silencing, although TBP binding remains unchanged. Furthermore, the Ty1 silencing is partially mediated by histone deacetylation and requires Set1-dependent histone methylation, pointing out an analogy with heterochromatin gene silencing. Our results show the first example of an RNA-dependent gene trans-silencing mediated by epigenetic marks in S. cerevisiae.