A euchromatic gene placed in the vicinity of heterochromatin by a chromosomal rearrangement generally exhibits position effect variegation (PEV), a clonally inherited pattern showing gene expression in some somatic cells but not in others. The mechanism responsible for this loss of gene expression is investigated here using fly lines carrying a P element containing the Drosophila melanogaster white and hsp26 genes. Following mobilization of the P element, a screen for variegation of white expression recovered inserts at pericentric, telomeric, and fourth chromosome regions. Previously identified suppressors of PEV suppressed white variegation of pericentric and fourth chromosome inserts but not telomeric inserts on the second and third chromosomes. This implies a difference in the mechanism for gene repression at telomeres. Heat shock-induced hsp26 expression was reduced from pericentric and fourth chromosome inserts but not from telomeric inserts. Chromatin structure analysis revealed that the variegating inserts showed a reduction in accessibility to restriction enzyme digestion in the hsp26 regulatory region in isolated nuclei. Micrococcal nuclease digests showed that pericentric inserts were packaged in a more regular nucleosome array than that observed for euchromatic inserts. These data suggest that altered chromatin packaging plays a role in PEV.