The Su(var)2-5 locus, an essential gene in Drosophila, encodes the heterochromatin-associated protein HP1. Here, we show that the Su(var)2-5 lethal period is late third instar. Maternal HP1 is still detectable in first instar larvae, but disappears by third instar, suggesting that developmentally late lethality is probably the result of depletion of maternal protein. We demonstrate that heterochromatic silencing of a normally euchromatic reporter gene is completely lost by third instar in zygotically HP1 mutant larvae, implying a defect in heterochromatin-mediated transcriptional regulation in these larvae. However, expression of the essential heterochromatic genes rolled and light is reduced in Su(var)2-5 mutant larvae, suggesting that reduced expression of essential heterochromatic genes could underlie the recessive lethality of Su(var)2-5 mutations. These results also show that HP1, initially recognized as a transcriptional silencer, is required for the normal transcriptional activation of heterochromatic genes.