Dynamic regulation of histone modifications is critical during development, and aberrant activity of chromatin-modifying enzymes has been associated with diseases such as cancer. Histone demethylases have been shown to play a key role in eukaryotic gene transcription; however, little is known about how their activities are coordinated in vivo to regulate specific biological processes. In Drosophila, two enzymes, dLsd1 (Drosophila ortholog of lysine-specific demethylase 1) and Lid (little imaginal discs), demethylate histone H3 at Lys 4 (H3K4), a residue whose methylation is associated with actively transcribed genes. Our studies show that compound mutation of Lid and dLsd1 results in increased H3K4 methylation levels. However, unexpectedly, Lid mutations strongly suppress dLsd1 mutant phenotypes. Investigation of the basis for this antagonism revealed that Lid opposes the functions of dLsd1 and the histone methyltransferase Su(var)3–9 in promoting heterochromatin spreading at heterochromatin–euchromatin boundaries. Moreover, our data reveal a novel role for dLsd1 in Notch signaling in Drosophila, and a complex network of interactions between dLsd1, Lid, and Notch signaling at euchromatic genes. These findings illustrate the complexity of functional interplay between histone demethylases in vivo, providing insights into the epigenetic regulation of heterochromatin/euchromatin boundaries by Lid and dLsd1 and showing their involvement in Notch pathway-specific control of gene expression in euchromatin.