A chromosome is composed of structurally and functionally distinct domains. However, the molecular mechanisms underlying the formation of chromatin structure and the function of subtelomeres, the telomere-adjacent regions, remain obscure. Here we report the roles of the conserved centromeric protein Shugoshin 2 (Sgo2) in defining chromatin structure and functions of the subtelomeres in the fission yeast Schizosaccharomyces pombe. We show that Sgo2 localizes at the subtelomeres preferentially during G2 phase and is essential for the formation of a highly condensed subtelomeric chromatin body 'knob'. Furthermore, the absence of Sgo2 leads to the derepression of the subtelomeric genes and premature DNA replication at the subtelomeric late origins. Thus, the subtelomeric specialized chromatin domain organized by Sgo2 represses both transcription and replication to ensure proper gene expression and replication timing.