RNAi pathways have evolved as important modulators of gene expression that act in the cytoplasm by degrading RNA target molecules via the activity of short (21-30nt) RNAs1-6 RNAi components have been reported to play a role in the nucleus as they are involved in epigenetic regulation and heterochromatin formation7-10. However, although RNAi-mediated post-transcriptional silencing (PTGS) is well documented, mechanisms of RNAi-mediated transcriptional gene silencing (TGS) and in particular the role of RNAi components in chromatin, especially in higher eukaryotes, are still elusive. Here we show that key RNAi components Dicer-2 (Dcr2) and and Argonaute-2 (AGO2) AGO2 associate with chromatin, with strong preference for euchromatic, transcriptionally active loci and interact with core transcription machinery. Notably Dcr2 and AGO2 loss of function show that transcriptional defects are accompanied by perturbation of Pol II positioning on promoters. Further, both Dcr2 and Ago2 null mutations as well as missense mutations compromising the RNAi activity impair global Pol II dynamics upon heat shock. Finally, AGO2 RIP-seq experiments reveal that, AGO2 is strongly enriched in small-RNAs encompassing promoter as well as other parts of heat shock and other gene loci on both sense and antisense, with a strong bias for antisense, particularly after heat shock. Taken together our results reveal a new scenario in which Dcr2 and AGO2 are globally associated with transcriptionally active loci and may play a pivotal role in shaping the transcriptome by controlling RNA Pol II processivity.