In mammals, G9a is a histone H3 lysine 9 (H3-K9)-specific histone methyltransferase (HMTase), known to be essential for murine embryogenesis. It has been reported that Drosophila G9a (dG9a) is a dominant suppressor of position effects of variegation, has HMTase activity in vitro, and is important for Drosophila development. Here we show that dG9a has H3-K9 dimethylation activity in vivo and is important for the recruitment of HP1 in the euchromatic region. Over-expression in eye imaginal discs inhibited the differentiation of pupal ommatidial cells and resulted in abnormal eye morphology (rough eye phenotype) in the adults, although a methylase defective mutant did not demonstrate such effects. These results suggest that HMTase activity of dG9a affects transcription of genes involved in pupal eye formation. The dG9a-induced rough eye phenotype was enhanced by a half-dose reduction of the Polycomb group (PcG) gene. In contrast, mutants for little imaginal discs (lid), encoding histone H3-K4 demethylase, demonstrated suppression of the rough eye phenotype induced by dG9a. Furthermore co-expression of Lid in eye imaginal discs enhanced the rough phenotype induced by dG9a. The results suggest that the function of dG9a is negatively regulated by the PcG complex and positively regulated by Lid in vivo.