Mutations in the suppressor of Hairy-wing [su(Hw)] locus reverse the phenotype of a number of tissue-specific mutations caused by insertion of a gypsy retrotransposon. The su(Hw) gene encodes a zinc finger protein which binds to a 430 bp region of gypsy shown to be both necessary and sufficient for its mutagenic effects. su(Hw) protein causes mutations by inactivation of enhancer elements only when a su(Hw) binding region is located between these regulatory sequences and a promoter. To understand the molecular basis of enhancer inactivation, we tested the effects of su(Hw) protein on expression of the mini-white gene. We find that su(Hw) protein stabilizes mini-white gene expression from chromosomal position-effects in euchromatic locations by inactivating negative and positive regulatory elements present in flanking DNA. Furthermore, the su(Hw) protein partially protects transposon insertions from the negative effects of heterochromatin. To explain our current results, we propose that su(Hw) protein alters the organization of chromatin by creating a new boundary in a pre-existing domain of higher order chromatin structure. This separates enhancers and silencers distal to the su(Hw) binding region into an independent unit of gene activity, thereby causing their inactivation.