DOT1 was originally identified as a gene affecting telomeric silencing in S. cerevisiae. We now find that Dot1p methylates histone H3 on lysine 79, which maps to the top and bottom of the nucleosome core. Methylation occurs only when histone H3 is assembled in chromatin. In vivo, Dot1p is solely responsible for this methylation and methylates ∼90% of histone H3. In dot1Δ cells, silencing is compromised and silencing proteins become redistributed at the expense of normally silenced loci. We suggest that methylation of histone H3 lysine 79 limits silencing to discrete loci by preventing the binding of Sir proteins elsewhere along the genome. Because Dot1p and histone H3 are conserved, similar mechanisms are likely at work in other eukaryotes.