DNA methylation and histone H3 Lys 9 dimethylation (H3K9me2) are important epigenetic repression marks for silencing transposons in heterochromatin and for regulating gene expression. However, the mechanistic relationship to other repressive marks, such as histone H3 Lys 27 trimethylation (H3K27me3) is unclear. FERTILIZATION-INDEPENDENT ENDOSPERM1 (FIE1) encodes an Esc-like core component of the Polycomb repressive complex 2, which is involved in H3K27me3-mediated gene repression. Here, we identify a gain-of-function epi-allele (Epi-df) of rice (Oryza sativa) FIE1; this allele causes a dwarf stature and various floral defects that are inherited in a dominant fashion. We found that Epi-df has no changes in nucleotide sequence but is hypomethylated in the 5' region of FIE1 and has reduced H3K9me2 and increased H3K4me3. In Epi-df, FIE1 was ectopically expressed and its imprinting was disrupted. FIE1 interacted with rice Enhancer of Zeste homologs, consistent with its role in H3K27me3 repression. Ectopic expression of FIE1 in Epi-df resulted in alteration of H3K27me3 levels in hundreds of genes. In summary, this work identifies an epi-allele involved in H3K27me3-mediated gene repression that itself is highly regulated by DNA methylation and histone H3K9me2, thereby shedding light on the link between DNA methylation and histone methylation, the two important epigenetic marks regulating rice development.