KAP1/TIF1beta is proposed to be a universal corepressor protein for the KRAB zinc finger protein (KRAB-zfp) superfamily of transcriptional repressors. To characterize the role of KAP1 and KAP1-interacting proteins in transcriptional repression, we investigated the regulation of stably integrated reporter transgenes by hormone-responsive KRAB and KAP1 repressor proteins. Here, we demonstrate that depletion of endogenous KAP1 levels by small interfering RNA (siRNA) significantly inhibited KRAB-mediated transcriptional repression of a chromatin template. Similarly, reduction in cellular levels of HP1alpha/beta/gamma and SETDB1 by siRNA attenuated KRAB-KAP1 repression. We also found that direct tethering of KAP1 to DNA was sufficient to repress transcription of an integrated transgene. This activity is absolutely dependent upon the interaction of KAP1 with HP1 and on an intact PHD finger and bromodomain of KAP1, suggesting that these domains function cooperatively in transcriptional corepression. The achievement of the repressed state by wild-type KAP1 involves decreased recruitment of RNA polymerase II, reduced levels of histone H3 K9 acetylation and H3K4 methylation, an increase in histone occupancy, enrichment of trimethyl histone H3K9, H3K36, and histone H4K20, and HP1 deposition at proximal regulatory sequences of the transgene. A KAP1 protein containing a mutation of the HP1 binding domain failed to induce any change in the histone modifications associated with DNA sequences of the transgene, implying that HP1-directed nuclear compartmentalization is required for transcriptional repression by the KRAB/KAP1 repression complex. The combination of these data suggests that KAP1 functions to coordinate activities that dynamically regulate changes in histone modifications and deposition of HP1 to establish a de novo microenvironment of heterochromatin, which is required for repression of gene transcription by KRAB-zfps.