Histone-modifying enzymes have enormous potential as regulators of the large-scale changes in gene expression occurring during differentiation. It is unclear how different combinations of histone modification coordinate regimes of transcription during development. We show that different methylation states of lysine 4 of histone H3 (H3K4) mark distinct developmental phases of the simple eukaryote, Dictyostelium. We demonstrate that the enzyme responsible for all mono, di and tri-methylation of H3K4 is the Dictyostelium homolog of the Set1 histone methyltransferase. In the absence of Set1, cells display unusually rapid development, characterized by precocious aggregation of amoebae into multicellular aggregates. Early differentiation markers are abundantly expressed in growing set1 cells, indicating the differentiation program is ectopically activated during growth. This phenotype is caused specifically by the loss of Set1 catalytic activity. Set1 mutants induce premature differentiation in wild-type cells, indicating Set1 regulates production of an extra-cellular factor required for the correct perception of growth conditions. Microarray analysis of the set1 mutants reveals genomic clustering of mis-expressed genes, suggesting a requirement for Set1 in the regulation of chromatin-mediated events at gene clusters.