Retrotransposon sequences are positioned throughout the genome of almost every eukaryote that has been sequenced. As mobilization of these elements can have detrimental effects on the transcriptional regulation and stability of an organism's genome, most organisms have evolved mechanisms to repress their movement. Here, we identify a novel role for the Drosophila melanogaster Condensin II subunit, dCAP-D3 in preventing the mobilization of retrotransposons located in somatic cell euchromatin. dCAP-D3 regulates transcription of euchromatic gene clusters which contain or are proximal to retrotransposon sequence. ChIP experiments demonstrate that dCAP-D3 binds to these loci and is important for maintaining a repressed chromatin structure within the boundaries of the retrotransposon and for repressing retrotransposon transcription. We show that dCAP-D3 prevents accumulation of double stranded DNA breaks within retrotransposon sequence, and decreased dCAP-D3 levels leads to a precise loss of retrotransposon sequence at some dCAP-D3 regulated gene clusters and a gain of sequence elsewhere in the genome. Homologous chromosomes exhibit high levels of pairing in Drosophila somatic cells, and our FISH analyses demonstrate that retrotransposon-containing euchromatic loci are regions which are actually less paired than euchromatic regions devoid of retrotransposon sequences. Decreased dCAP-D3 expression increases pairing of homologous retrotransposon-containing loci in tissue culture cells. We propose that the combined effects of dCAP-D3 deficiency on double strand break levels, chromatin structure, transcription and pairing at retrotransposon-containing loci may lead to 1) higher levels of homologous recombination between repeats flanking retrotransposons in dCAP-D3 deficient cells and 2) increased retrotransposition. These findings identify a novel role for the anti-pairing activities of dCAP-D3/Condensin II and uncover a new way in which dCAP-D3/Condensin II influences local chromatin structure to help maintain genome stability.