Histone H3 lysine 9 methylation (H3K9me) mediates heterochromatic gene silencing and is important for genome stability and the regulation of gene expression(1-4). The establishment and epigenetic maintenance of heterochromatin involve the recruitment of H3K9 methyltransferases to specific sites on DNA, followed by the recognition of pre-existing H3K9me by the methyltransferase and methylation of proximal histone H3(5-11). This positive feedback loop must be tightly regulated to prevent deleterious epigenetic gene silencing. Extrinsic anti-silencing mechanisms involving histone demethylation or boundary elements help to limit the spread of inappropriate H3K9me(12-15). However, how H3K9 methyltransferase activity is locally restricted or prevented from initiating random H3K9me-which would lead to aberrant gene silencing and epigenetic instability-is not fully understood. Here we reveal an autoinhibited conformation in the conserved H3K9 methyltransferase Clr4 (also known as Suv39h) of the fission yeast Schizosaccharomyces pombe that has a critical role in preventing aberrant heterochromatin formation. Biochemical and X-ray crystallographic data show that an internal loop in Clr4 inhibits the catalytic activity of this enzyme by blocking the histone H3K9 substrate-binding pocket, and that automethylation of specific lysines in this loop promotes a conformational switch that enhances the H3K9me activity of Clr4. Mutations that are predicted to disrupt this regulation lead to aberrant H3K9me, loss of heterochromatin domains and inhibition of growth, demonstrating the importance of the intrinsic inhibition and auto-activation of Clr4 in regulating the deposition of H3K9me and in preventing epigenetic instability. Conservation of the Clr4 autoregulatory loop in other H3K9 methyltransferases and the automethylation of a corresponding lysine in the human SUV39H2 homologue(16) suggest that the mechanism described here is broadly conserved.