Small RNAs produced by an RNAi-related mechanism are involved in DNA elimination during development of the somatic macronucleus from the germline micronucleus in Tetrahymena. The properties of these small RNAs can explain how the primary sequence of the parental macronucleus epigenetically controls genome rearrangement in the new macronucleus and provide the first demonstration of an RNAi-mediated process that directly alters DNA sequence organization. Methylation of histone H3 on lysine 9 and accumulation of chromodomain proteins, hallmarks of heterochromatin, also occur specifically on sequences undergoing elimination and are dependent on the small RNAs. These findings contribute to a new paradigm of chromatin biology: regulation of heterochromatin formation by RNAi-related mechanisms in eukaryotes.