The condensed heterochromatic domains are known to be associated with transcriptional repression and cell differentiation. Here, we investigate the function of heterochromatin protein HP1b, a member of the HP1 family in Drosophila melanogaster, in transcription and development. Both knockdown and overexpression of HP1b resulted in partial lethality, indicating that HP1b is essential for the normal development. In contrast to the positive role of HP1a in heterochromatin formation, overexpression of HP1b decondensed the pericentromeric heterochromatin and reduced the association of HP1a and H3K9me2 with it, both known markers of pericentric heterochromatin. Interestingly, the structure of the heterochromatic fourth chromosome appeared not to be affected. Further experiments showed that the presence of HP1a partially rescued the lethality caused by HP1b overexpression in males, and it fully rescued the lethality in females. Consistent with this observation, the defective transcription of heterochromatic genes was also partially restored in the presence of HP1a. Overall, this study argues that HP1b counteracts HP1a function both in heterochromatin formation and in the transcriptional regulation of euchromatic genes.