Trimethylation of histone H3 at lysine 27 (H3-K27me3) by Polycomb repressive complex 2 (PRC2) is a key step for transcriptional repression by the Polycomb system. Demethylation of H3-K27me3 by Utx and/or its paralogs has consequently been proposed to be important for counteracting Polycomb repression. To study the phenotype of Drosophila mutants that lack H3-K27me3 demethylase activity, we created Utx(Δ), a deletion allele of the single Drosophila Utx gene. Utx(Δ) homozygotes that contain maternally deposited wild-type Utx protein develop into adults with normal epidermal morphology but die shortly after hatching. By contrast, Utx(Δ) homozygotes that are derived from Utx mutant germ cells and therefore lack both maternal and zygotic Utx protein, die as larvae and show partial loss of expression of HOX genes in tissues in which these genes are normally active. This phenotype classifies Utx as a trithorax group regulator. We propose that Utx is needed in the early embryo to prevent inappropriate instalment of long-term Polycomb repression at HOX genes in cells in which these genes must be kept active. In contrast to PRC2, which is essential for, and continuously required during, germ cell, embryonic and larval development, Utx therefore appears to have a more limited and specific function during development. This argues against a continuous interplay between H3-K27me3 methylation and demethylation in the control of gene transcription in Drosophila. Furthermore, our analyses do not support the recent proposal that Utx would regulate cell proliferation in Drosophila as Utx mutant cells generated in wild-type animals proliferate like wild-type cells.