In a variety of organisms, genes placed near heterochromatin are transcriptionally silenced. In order to understand the molecular mechanisms responsible for this block in transcription, high resolution in vivo chromatin structure analysis was performed on two heat shock genes, hsp26 and hsp70. These genes normally reside in euchromatin where GAGA factor and RNA Pol II are present on the promoter prior to heat shock induction. P-element transformation experiments led to the identification of stocks in which these two genes were inserted within heterochromatin of the chromosome 4 telomeric region. These transgenes exhibit silencing that is partially suppressed by mutations in the gene encoding HP1. Micrococcal nuclease analysis revealed that the heterochromatic transgenes were packaged in a more regular nucleosome array than when located in euchromatin. High resolution DNase I analysis demonstrated that GAGA factor and TFIID were not associated with these promoters in heterochromatin; potassium permanganate experiments showed a loss of Pol II association. Taken together, these data suggest that occlusion of trans-acting factors from their cis- acting regulatory elements leading to a block in promoter potentiation is a mechanism for heterochromatin gene silencing.