Animals change developmental fates in response to external cues. In the nematode Caenorhabditis elegans, unfavorable environmental conditions induce a state of diapause known as dauer by inhibiting the conserved DAF-2 insulin-like signaling (ILS) pathway through incompletely understood mechanisms. We have previously established a role for the C. elegans dosage compensation protein DPY-21 in the control of dauer arrest and DAF-2 ILS. Here, we show that the histone H4 lysine 20 methyltransferase SET-4, which also influences dosage compensation, promotes dauer arrest in part by repressing the X-linked ins-9 gene, which encodes a new agonist insulin-like peptide (ILP) expressed specifically in the paired ASI sensory neurons that are required for dauer bypass. ins-9 repression in dauer-constitutive mutants requires DPY-21, SET-4 and the FoxO transcription factor DAF-16, which is the main target of DAF-2 ILS. By contrast, autosomal genes encoding major agonist ILPs that promote reproductive development are not repressed by DPY-21, SET-4 or DAF-16/FoxO. Our results implicate SET-4 as a sensory rheostat that reinforces developmental fates in response to environmental cues by modulating autocrine and paracrine DAF-2 ILS.