Heterochromatin protein 1 (HP1) was originally described as a non-histone chromosomal protein and is required for transcriptional gene silencing and the formation of heterochromatin. Although it is localized primarily at pericentric heterochromatin, a scattered distribution over a large number of euchromatic loci is also evident. Here, we provide evidence that Drosophila HP1 is essential for the maintenance of active transcription of euchromatic genes functionally involved in cell-cycle progression, including those required for DNA replication and mitosis. Depletion of HP1 in proliferating embryonic cells caused aberrant progression of the cell cycle at S phase and G2/M phase, linked to aberrant chromosome segregation, cytokinesis, and an increase in apoptosis. The chromosomal distribution of Aurora B, and the level of phosphorylation of histone H3 serine 10 were also altered in the absence of HP1. Using chromatin immunoprecipitation analysis, we further demonstrate that the promoters of a number of cell-cycle regulator genes are bound to HP1, supporting a direct role for HP1 in their active transcription. Overall, our data suggest that HP1 is essential for the maintenance of cell-cycle progression and the transcription of cell-cycle regulatory genes. The results also support the view that HP1 is a positive regulator of transcription in euchromatin.