Histone lysine methylation is an epigenetic mark to index chromosomal subdomains. In Drosophila, H3-K9 di- and trimethylation is mainly controlled by the heterochromatic SU(VAR)3-9 HMTase, a major regulator of position-effect variegation (PEV). In contrast, all H3-K27 methylation states are independently mediated by the Pc-group enzyme E(Z). Analysis of 19 point mutants demonstrates that the silencing potential of Su(var)3-9 increases with its associated HMTase activity. A hyperactive Su(var)3-9 mutant, pitkin(D), displays extensive H3-K9 di- and trimethylation within but also outside pericentric heterochromatin. Su(var)3-9 mutants display severely chromosomal instabilities during early embryogenesis that are associated with perturbed HMTase activity. SU(VAR)3-9-dependent H3-K9 methylation is required for the induction of H4-K20 trimethylation mediated by SUV4-20. The absence of H4-K20 trimethylation in HP1 null mutants suggests a sequential mechanism to establish H3-K9 and H4-K20 trimethylation at pericentric heterochromatin. The classification of Suv4-20 as a dominant Suppressor of PEV further indicates a functional role for Suv4-20-dependent H4-K20 trimethylation in gene silencing. Notably, mutations in a novel Su(var) gene, Su(var)3-1, severely restrict Su(var)3-9-mediated gene silencing. Su(var)3-1 was identified as "antimorphic" mutants of the euchromatic H3-S10 kinase JIL-1. JIL-1Su(var)3-1 mutants maintain kinase activity and do not detectably impair repressive histone lysine methylation marks. However, analyses with seven different PEV rearrangements demonstrate a general role of JIL-1Su(var)3-1 in controlling heterochromatin compaction and expansion. Our data provide evidence for a dynamic balance between heterochromatin and euchromatin, and define two distinct mechanisms for Su(var) gene function. Whereas the majority of Su(var)s encode inherent components of heterochromatin that can establish repressive chromatin structures [intrinsic Su(var)s], Su(var)3-1 reflects gain-of-function mutants of a euchromatic component that antagonize the expansion of heterochromatic subdomains [acquired Su(var)s].