Yeast SIR2 is a NAD+-dependent histone deacetylase required for heterochromatic silencing at telomeres, rDNA, and mating-type loci. We find that the Drosophila homolog of Sir2 (dSir2) also encodes deacetylase activity and is required for heterochromatic silencing, but unlike ySir2, is not required for silencing at telomeres. We show that dSir2 interacts genetically and physically with members of the Hairy/Deadpan/E(Spl) family of bHLH euchromatic repressors, key regulators of Drosophila development. dSir2 is an essential gene whose loss of function results in both segmentation defects and skewed sex ratios, associated with reduced activities of the Hairy and Deadpan bHLH repressors. These results indicate that Sir2 in higher organisms plays an essential role in both euchromatic repression and heterochromatic silencing.