Polycomb Group (PcG) proteins form memory of transient transcriptional repression that is necessary for development. In Drosophila, DNA elements termed Polycomb Response Elements (PREs) recruit PcG proteins. How PcG activities are targeted to PREs to maintain repressed states only in appropriate developmental contexts has been difficult to elucidate. PcG complexes modify chromatin, but also interact with both RNA and DNA, and RNA is implicated in PcG targeting and function. Here we show that R-loops form at many PREs in Drosophila embryos, and correlate with repressive states. In vitro, both PRC1 and PRC2 can recognize R-loops and open DNA bubbles. Unexpectedly, we find that PRC2 drives formation of RNA-DNA hybrids, the key component of R-loops, from RNA and dsDNA. Our results identify R-loop formation as a feature of Drosophila PREs that can be recognized by PcG complexes, and RNA-DNA strand exchange as a PRC2 activity that could contribute to R-loop formation.