The Drosophila heterochromatin protein 1 (HP1) regulates epigenetic gene silencing and heterochromatin formation by promoting and maintaining chromatin condensation. Here we report the identification and characterization of an HP1-interacting protein (Hip). Hip interacts with HP1 in vitro and is associated with HP1 in vivo. This interaction is mediated by at least three independent but similar HP1-binding modules of the Hip protein. Hip and HP1 completely colocalize in the pericentric heterochromatin, and both haplo- and triplo-dosage mutations act as dominant suppressors of position effect variegation. These findings identify a player in heterochromatinization and suggest that Hip cooperates with HP1 in chromatin remodeling and gene silencing.