In Drosophila, dosage compensation augments X chromosome-linked transcription in males relative to females. This process is achieved by the Dosage Compensation Complex (DCC), which associates specifically with the male X chromosome. We previously found that the morphology of this chromosome is sensitive to the amounts of the heterochromatin-associated protein SU(VAR)3-7. In this study, we examine the impact of change in levels of SU(VAR)3-7 on dosage compensation. We first demonstrate that the DCC makes the X chromosome a preferential target for heterochromatic markers. In addition, reduced or increased amounts of SU(VAR)3-7 result in redistribution of the DCC proteins MSL1 and MSL2, and of Histone 4 acetylation of lysine 16, indicating that a wild-type dose of SU(VAR)3-7 is required for X-restricted DCC targeting. SU(VAR)3-7 is also involved in the dosage compensated expression of the X-linked white gene. Finally, we show that absence of maternally provided SU(VAR)3-7 renders dosage compensation toxic in males, and that global amounts of heterochromatin affect viability of ectopic MSL2-expressing females. Taken together, these results bring to light a link between heterochromatin and dosage compensation.