During macronuclear differentiation of the ciliate Tetrahymena thermophila, genome-wide DNA rearrangements eliminate nearly 50 Mbp of germline derived DNA, creating a streamlined somatic genome. The transposon-like and other repetitive sequences to be eliminated are identified using a piRNA pathway and packaged as heterochromatin prior to their removal. In this study, we show that LIA5, which encodes a zinc-finger protein likely of transposon origin, is required for both chromosome fragmentation and DNA elimination events. Lia5p acts after the establishment of RNAi-directed heterochromatin modifications, but prior to the excision of the modified sequences. In ∆LIA5 cells, DNA elimination foci, large nuclear sub-structures containing the sequences to be eliminated and the essential chromodomain protein Pdd1p, do not form. Lia5p, unlike Pdd1p, is not stably associated with these structures, but is required for their formation. In the absence of Lia5p, we could recover foci formation by ectopically inducing DNA damage by UV treatment. Foci in both wild-type or UV-treated ∆LIA5 cells contain dephosphorylated Pdd1p. These studies of LIA5 reveal that DNA elimination foci form after the excision of germ-line limited sequences occurs and indicate that Pdd1p reorganization is likely mediated through a DNA damage response.