The suppressor of Hairy-wing [su(Hw)] protein mediates the mutagenic effect of the gypsy retrotransposon by repressing the function of transcriptional enhancers located distally from the promoter with respect to the position of the su(Hw)-binding region. Mutations in a second gene, modifier of mdg4, also affect the gypsy-induced phenotype. Two major effects of the mod(mdg4)1u1 mutation can be distinguished: the interference with insulation by the su(Hw)-binding region and direct inhibition of gene expression that is not dependent on the su(Hw)-binding region position. The mod(mdg4)1u1 mutation partially suppresses ct6, scD1 and Hw1 mutations, possibly by interfering with the insulation effect of the su(Hw)-binding region. An example of the second effect of mod(mdg4)1u1 is a complete inactivation of yellow expression in combination with the y2 allele. Phenotypic analyses of flies with combinations of mod(mdg4)1u1 and different su(Hw) mutations, or with constructions carrying deletions of the acidic domains of the su(Hw) protein, suggest that the carboxy-terminal acidic domain is important for direct inhibition of yellow transcription in bristles, while the amino-terminal acidic domain is more essential for insulation.