Post-translational modifications of histones are involved in transcript initiation and elongation. Methylation of lysine 36 of histone H3 (H3K36me) resides promoter distal at transcribed regions in Saccharomyces cerevisiae and is thought to prevent spurious initiation through recruitment of histone-deacetylase activity. Here, we report surprising complexity in distribution, regulation and readout of H3K36me in Drosophila involving two histone methyltransferases (HMTases). Dimethylation of H3K36 peaks adjacent to promoters and requires dMes-4, whereas trimethylation accumulates toward the 3' end of genes and relies on dHypb. Reduction of H3K36me3 is lethal in Drosophila larvae and leads to elevated levels of acetylation, specifically at lysine 16 of histone H4 (H4K16ac). In contrast, reduction of both di- and trimethylation decreases lysine 16 acetylation. Thus di- and trimethylation of H3K36 have opposite effects on H4K16 acetylation, which we propose enable dynamic changes in chromatin compaction during transcript elongation.