Insulators are DNA elements that divide chromosomes into independent transcriptional domains. The Drosophila genome contains hundreds of binding sites for the Suppressor of Hairy-wing [Su(Hw)] insulator protein, corresponding to locations of the retroviral gypsy insulator and non-gypsy binding regions (BRs). The first non-gypsy BR identified, 1A-2, resides in cytological region 1A. Using a quantitative transgene system, we show that 1A-2 is a composite insulator containing enhancer blocking and facilitator elements. We discovered that 1A-2 separates the yellow (y) gene from a previously unannotated, non-coding RNA gene, named yar for y-achaete (ac) intergenic RNA. The role of 1A-2 was elucidated using homologous recombination to excise these sequences from the natural location, representing the first deletion of any Su(Hw) BR in the genome. Loss of 1A-2 reduced yar RNA accumulation, without affecting mRNA levels from the neighboring y and ac genes. These data indicate that within the 1A region, 1A-2 acts an activator of yar transcription. Taken together, these studies reveal that the properties of 1A-2 are context-dependent, as this element has both insulator and enhancer activities. These findings imply that the function of non-gypsy Su(Hw) BRs depends on the genomic environment, predicting that Su(Hw) BRs represent a diverse collection of genomic regulatory elements.