Heterochromatin formation drives epigenetic mechanisms associated with silenced gene expression. Repressive heterochromatin is established through the RNA interference pathway, triggered by double-stranded RNAs (dsRNAs) that can be modified via RNA editing. However, the biological consequences of such modifications remain enigmatic. Here we show that RNA editing regulates heterochromatic gene silencing in Drosophila. We utilize the binding activity of an RNA-editing enzyme to visualize the in vivo production of a long dsRNA trigger mediated by Hoppel transposable elements. Using homologous recombination, we delete this trigger, dramatically altering heterochromatic gene silencing and chromatin architecture. Furthermore, we show that the trigger RNA is edited and that dADAR serves as a key regulator of chromatin state. Additionally, dADAR auto-editing generates a natural suppressor of gene silencing. Lastly, systemic differences in RNA editing activity generates interindividual variation in silencing state within a population. Our data reveal a global role for RNA editing in regulating gene expression.