Heterochromatin has been defined as deeply staining chromosomal material that remains condensed in interphase, whereas euchromatin undergoes de-condensation. Heterochromatin is found near centromeres and telomeres, but interstitial sites of heterochromatin (knobs) are common in plant genomes and were first described in maize. These regions are repetitive and late-replicating. In Drosophila, heterochromatin influences gene expression, a heterochromatin phenomenon called position effect variegation. Similarities between position effect variegation in Drosophila and gene silencing in maize mediated by "controlling elements" (that is, transposable elements) led in part to the proposal that heterochromatin is composed of transposable elements, and that such elements scattered throughout the genome might regulate development. Using microarray analysis, we show that heterochromatin in Arabidopsis is determined by transposable elements and related tandem repeats, under the control of the chromatin remodelling ATPase DDM1 (Decrease in DNA Methylation 1). Small interfering RNAs (siRNAs) correspond to these sequences, suggesting a role in guiding DDM1. We also show that transposable elements can regulate genes epigenetically, but only when inserted within or very close to them. This probably accounts for the regulation by DDM1 and the DNA methyltransferase MET1 of the euchromatic, imprinted gene FWA, as its promoter is provided by transposable-element-derived tandem repeats that are associated with siRNAs.