In yeast (Saccharomyces cerevisiae), transcriptional activators, such as Gal4 and Gal4-VP16, work ordinarily from sites located in the upstream activating sequence (UAS) positioned about 250 base pairs upstream of the transcription start site. In contrast to their behaviour in mammalian cells, however, such activators fail to work when positioned at distances greater than approximately 600-700 base pairs upstream, or anywhere downstream of the gene. Here we show that, in yeast, a gene bearing an enhancer positioned 1-2 kilobases downstream of the gene is activated if the reporter is linked to a telomere, but not if it is positioned at an internal chromosomal locus. These observations are explained by the finding that yeast telomeres form back-folding, or looped, structures. Because yeast telomeric regions resemble the heterochromatin found in higher eukaryotes, these findings might also explain why transcription of some higher eukaryotic genes depends on their location in heterochromatin.