The assembly of higher order chromatin structures has been linked to the covalent modifications of histone tails. We provide in vivo evidence that lysine 9 of histone H3 (H3 Lys⁹) is preferentially methylated by the Clr4 protein at heterochromatin-associated regions in fission yeast. Both the conserved chromo- and SET domains of Clr4 are required for H3 Lys⁹methylation in vivo. Localization of Swi6, a homolog ofDrosophila HP1, to heterochomatic regions is dependent on H3 Lys⁹ methylation. Moreover, an H3-specific deacetylase Clr3 and a β-propeller domain protein Rik1 are required for H3 Lys⁹ methylation by Clr4 and Swi6 localization. These data define a conserved pathway wherein sequential histone modifications establish a “histone code” essential for the epigenetic inheritance of heterochromatin assembly.