Genetic conflicts between sexes and generations provide a foundation for understanding the functional evolution of sex chromosomes and sexually dimorphic phenotypes. Y chromosomes of Drosophila contain multi-megabase stretches of satellite DNA repeats and a handful of protein-coding genes that are monomorphic within species. Nevertheless, polymorphic variation in heterochromatic Y chromosomes of Drosophila result in genome-wide gene expression variation. Here we show that such naturally occurring Y-linked regulatory variation (YRV) can be detected in somatic tissues and contributes to the epigenetic balance of heterochromatin/euchromatin at three distinct loci showing position-effect variegation (PEV). Moreover, polymorphic Y chromosomes differentially affect the expression of thousands of genes in XXY female genotypes in which Y-linked protein-coding genes are not transcribed. The data show a disproportionate influence of YRV on the variable expression of genes whose protein products localize to the nucleus, have nucleic-acid binding activity, and are involved in transcription, chromosome organization, and chromatin assembly. These include key components such as HP1, Trithorax-like (GAGA factor), Su(var)3-9, Brahma, MCM2, ORC2, and inner centromere protein. Furthermore, mitochondria-related genes, immune response genes, and transposable elements are also disproportionally affected by Y chromosome polymorphism. These functional clusterings may arise as a consequence of the involvement of Y-linked heterochromatin in the origin and resolution of genetic conflicts between males and females. Taken together, our results indicate that Y chromosome heterochromatin serves as a major source of epigenetic variation in natural populations that interacts with chromatin components to modulate the expression of biologically relevant phenotypic variation.