The best-characterized insulator in Drosophila melanogaster is the Su(Hw)-binding region contained within the gypsy retrotransposon. In the y(2) mutant, Su(Hw) protein partially inhibits yellow transcription by blocking the function of transcriptional enhancers located distally from the yellow promoter with respect to gypsy. Previously we have shown that yellow enhancers can overcome inhibition by a downstream insulator in the y(rh1) allele, when a second gypsy element is located upstream of the enhancers. To understand how two insulators neutralize each other, we isolated various deletions that terminate in the regulatory region of the y(rh1) allele. To generate these alleles we used DNA elongation by gene conversion of the truncated chromosomes at the end of the yellow regulatory region. We found that gypsy insulator can function at the end of the truncated chromosome. Addition of the gypsy insulator upstream of the yellow enhancers overcomes the enhancer-blocking activity of the gypsy insulator inserted between the yellow enhancers and promoter. These results suggest that the gypsy insulators do not form separate transcriptional domains that delimit the interactions between enhancers and promoters.