The development of multi-cellular organisms is regulated by the ordered definition of gene expression programmes that govern cell proliferation and differentiation. Although differential gene activity is mainly controlled by transcription factors, it is also dependent upon the underlying chromatin structure, which can stabilize transcriptional "on" or "off" states. We have recently isolated human (SUV39H1) and mouse (Suv39h1) histone methyltransferases (HMTases) and shown that they are important regulators for the organization of repressive chromatin domains. To investigate whether a SUV39H1-induced modulation of heterochromatin would affect mammalian development, we generated transgenic mice that over-express the SUV39H1 HMTase early during embryogenesis. SUV39H1 transgenic mice are growth retarded, display a weak penetrance of skeletal transformations and are largely characterized by impaired erythroid differentiation, consistent with highest transgene expression in foetal liver. Ex vivo transgenic foetal liver cultures initially contain reduced numbers of cells in G1 but progress to immortalized erythroblasts that are compromised in executing an erythroid differentiation programme. The outgrowing SUV39H1-immortalized erythroblasts can maintain a diploid karyotype despite deregulation of several tumour suppressor proteins and dispersed distribution of the heterochromatin component HP1. Together, these data provide evidence for a role of the SUV39H1 HMTase during the mammalian development and indicate a possible function for higher-order chromatin in contributing to the balance between proliferation and differentiation potentials of progenitor cells.