Position-effect variegation results from mosaic silencing by chromosomal rearrangements juxtaposing euchromatin genes next to pericentric heterochromatin. An increase in the amounts of the heterochromatin-associated Su(var)3-7 and HP1 proteins augments silencing. Using the yeast two-hybrid protein interaction trap system, we have isolated HP1 using Su(var)3-7 as a bait. We have then delimited three binding sites on Su(var)3-7 for HP1. On HP1, the C-terminal moiety, including the chromo shadow domain, is required for interaction. In vivo, both proteins co-localise not only in heterochromatin, but also in a limited set of sites in euchromatin and at telomeres. When delocalised to the sites bound by the protein Polycomb in euchromatin, HP1 recruits Su(var)3-7. Finally, and in contrast with euchromatin genes, a decrease in the amounts of both proteins enhances variegation of the light gene, one of the few genetic loci mapped within pericentric heterochromatin. This body of data supports a direct link between Su(var)3-7 and HP1 in the genomic silencing of position-effect variegation.