Recent studies show that heterochromatin-associated protein-1 (HP1) recognizes a 'histone code' involving methylated Lys9 (methyl-K9) in histone H3. Using in situ immunofluorescence, we demonstrate that methyl-K9 H3 and HP1 co-localize to the heterochromatic regions of Drosophila polytene chromosomes. NMR spectra show that methyl-K9 binding of HP1 occurs via its chromo (chromosome organization modifier) domain. This interaction requires methyl-K9 to reside within the proper context of H3 sequence. NMR studies indicate that the methylated H3 tail binds in a groove of HP1 consisting of conserved residues. Using fluorescence anisotropy and isothermal titration calorimetry, we determined that this interaction occurs with a K(D) of approximately 100 microM, with the binding enthalpically driven. A V26M mutation in HP1, which disrupts its gene silencing function, severely destabilizes the H3-binding interface, and abolishes methyl-K9 H3 tail binding. Finally, we note that sequence diversity in chromo domains may lead to diverse functions in eukaryotic gene regulation. For example, the chromo domain of the yeast histone acetyltransferase Esa1 does not interact with methyl- K9 H3, but instead shows preference for unmodified H3 tail.