Epigenetic indexing of chromatin domains by histone lysine methylation requires the balanced coordination of methyltransferase (HMTase) and demethylase activities. SU(VAR)3-3, the Drosophila homolog of the human LSD1 amine oxidase, selectively demethylates H3K4me2 and H3K4me1, and facilitates the subsequent methylation of H3K9 by SU(VAR)3-9. Su(var)3-3 mutations suppress heterochromatic gene silencing and display elevated levels of H3K4me2 that prevent the full extension of H3K9me2 at pericentric heterochromatin. SU(VAR)3-3 colocalizes with H3K4me2 in interband regions, and is particularly abundant during embryogenesis and in syncytial blastoderm, where it appears concentrated at prospective heterochromatin during developmental cycle 14. In embryos of Su(var)3-3/+ females, H3K4me2 accumulates in primordial germ cells, and the deregulated expansion of H3K4me2 antagonizes heterochromatic H3K9me2 and me3 at the blastoderm stage. These data indicate an early developmental function for the SU(VAR)3-3 demethylase in controlling the definition of euchromatic and heterochromatic domains and reveal a hierarchy, in which SU(VAR)3-3-mediated removal of activating histone marks are a prerequisite for subsequent heterochromatin formation by repressive H3K9 methylation.