In Drosophila, the as yet uncloned heterochromatic locus flamenco (flam) controls mobilization of the endogenous retrovirus gypsy through the repeat-associated small interfering (rasi) RNA silencing pathway. Restrictive alleles (flamR) downregulate accumulation of gypsy transcripts in the somatic follicular epithelium of the ovary. In contrast, permissive alleles (flamP) are unable to repress gypsy. DIP1, the closest transcription unit to a flam-insertional mutation, was considered as a good candidate to be a gypsy regulator, since it encodes a dsRNA-binding protein. To further characterize the locus we analyzed P-induced flam mutants and generated new mutations by transposon mobilization. We show that flam is required somatically for morphogenesis of the follicular epithelium, the tissue where gypsy is repressed. This developmental activity is necessary to control gypsy and another retroelement, ZAM. We also show that flam is not DIP1, as none of the new permissive mutants affect the DIP1 coding sequence. In addition, two deletions removing DIP1 coding sequences do not affect any of the flamenco functions. Our results suggest that flamenco extends proximally to DIP1, spanning >130 kb of transposon-rich heterochromatin. We propose a model explaining the multiple functions of this large heterochromatic locus.