Heterochromatin protein 1 (HP1), first discovered in Drosophila melanogaster, is a highly conserved chromosomal protein implicated in both heterochromatin formation and gene silencing. We report here characterization of an HP1-interacting protein, heterochromatin protein 2 (HP2), which codistributes with HP1 in the pericentric heterochromatin. HP2 is a large protein with two major isoforms of approximately 356 and 176 kDa. The smaller isoform is produced from an alternative splicing pattern in which two exons are skipped. Both isoforms contain the domain that interacts with HP1; the larger isoform contains two AT-hook motifs. Mutations recovered in HP2 act as dominant suppressors of position effect variegation, confirming a role in heterochromatin spreading and gene silencing.